Capital Gains Tax on Investment Property: Main Residence Exemption, 6-Year Rule, and Foreign Resident Withholding

Capital Gains Tax (CGT) is the largest tax cost most property owners face — but the rules contain genuine optimisations that can save tens or hundreds of thousands. The main residence exemption, the 6-year absence rule, the partial-exemption rules for partly-rented main residences, and the foreign resident CGT withholding all materially affect what you keep when you sell. Buyers planning to hold-then-rent, rent-then-occupy, or use partial property for income should plan their CGT position before signing.

This guide covers the major CGT rules for Victorian residential property — main residence exemption, the 6-year rule, partial use, foreign resident withholding, and how the rules apply to your specific situation.

The main residence exemption

Under the Income Tax Assessment Act 1997 (Cth), the capital gain on the sale of a property that has been your main residence throughout the period of ownership is fully exempt from CGT. The exemption is automatic — no application needed.

Conditions:

• You moved in as soon as practicable after purchase
• You lived there throughout your period of ownership
• You did not use the property to produce assessable income (or only minor incidental use)
• You owned no more than two hectares

The 6-year absence rule

If you move out of your main residence and rent it out, you can continue to treat it as your main residence for up to six years for CGT purposes — provided you don’t establish another property as your main residence. This is the “6-year rule” and it’s enormously valuable for buyers who:

• Move overseas for work and rent out their Australian home
• Take a long-distance job and live with family or rent elsewhere
• Move to a regional area and rent out the city home
• Travel for an extended period

How the 6-year rule works in practice

Example: you buy a Melbourne home in 2020 for $800,000. You live in it until 2024, then move to Sydney for work and rent the Melbourne home. You return in 2029 (5 years away) and sell in 2030 for $1.4 million.

Capital gain: $600,000. Under the 6-year rule, the entire period is treated as main residence (you returned within 6 years). Result: $0 CGT, full exemption.

Without the 6-year rule, the partial exemption would have been based on time-as-main-residence vs total ownership period. Approximate result: $300,000+ CGT exposure.

Partial main residence — when you rent out a room

Many Australians rent out a bedroom for income while maintaining the property as their main residence. CGT treatment:

• Capital gain is partially exempt
• Apportionment based on floor area of rented portion vs total floor area
• Additional apportionment for time the rental occurred
• 50% CGT discount applies on remaining taxable portion if held over 12 months

Foreign resident CGT withholding

Since 2017, foreign-resident vendors selling Victorian property valued at $750,000+ have 12.5% of the sale price withheld at settlement and remitted to the ATO as a CGT prepayment. The buyer (yes, the buyer) is responsible for the withholding.

Critical for buyers:

• Vendor must provide an ATO clearance certificate before settlement
• Without certificate, buyer must withhold 12.5% from settlement payment
• Buyer remits to ATO within 7 days of settlement
• Failure to withhold makes the buyer personally liable for the 12.5%

Always confirm the ATO clearance certificate is provided. If not, your conveyancer must withhold and remit.

The 50% CGT discount

Capital gains on assets held more than 12 months are taxed at 50% of the marginal rate (for individuals) or 33.3% (for super funds). For trusts, the discount can flow through to beneficiaries.

Holding for 12+ months is a major optimisation. Avoid selling at 11 months when you can sell at 13 months.

Cost base — what you can add to your purchase price

The CGT cost base includes more than just the purchase price:

• Purchase price + stamp duty + legal fees
• Improvement costs (renovations, additions)
• Holding costs (rates, interest, insurance) — only when not used as main residence
• Sale costs (agent fees, legal fees, advertising)

Keep records of every expense. Inadequate records can mean missing out on $50,000+ of cost base, costing the same in CGT.

CGT planning — common buyer scenarios

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