The 6-Year CGT Absence Rule: How s 118-145 ITAA 1997 Lets You Rent Out Your Main Residence Tax-Free

Most Australians who rent out their main residence don't realise that, under section 118-145 of the Income Tax Assessment Act 1997, the property can still qualify for the main residence CGT exemption for up to six years of absence — even while it is being rented and earning income. With the 2026 Federal Budget tightening negative gearing rules, the 6-year absence rule is now the bigger tax lever for most homeowners. Here is the practical version of how it works.

The basic rule — what s 118-145 says

If you stop using a dwelling as your main residence, you can choose to continue treating it as your main residence for CGT purposes. If the dwelling is rented out (i.e. used to produce income), the choice covers a maximum of 6 years of absence at a time. If the dwelling is NOT rented out (e.g. left vacant or used by family rent-free), the choice covers an unlimited absence period. The 6-year limit only applies while it is income-producing.

Worked example: Sarah's $250,000 tax-free gain

Sarah buys a Melbourne apartment for $600,000 in 2020 and lives in it for two years. In 2022 she moves overseas for work and rents it out for four years. She returns to Australia in 2026 and immediately sells it for $850,000. Because Sarah made the s 118-145 absence election, the apartment is treated as her main residence for the entire ownership period. The $250,000 gain is fully CGT-exempt. No capital gains tax. No 50% discount calculation needed — the gain itself is disregarded.

The cost-base reset trick — s 118-192

When a dwelling that was your main residence is first used to produce income, section 118-192 resets the cost base to the property's market value on the day it first earned rent. This is the 'home first used to produce income' rule. If the property had grown in value while you lived in it, that pre-rental growth is locked in and stays tax-free. Only growth from the date of first rent onwards is potentially taxable — and even then, the s 118-145 absence election can still wipe that out if you sell within six years.

Five things people get wrong about the 6-year rule

1. You can only claim one main residence at a time. If you buy a new home while still electing s 118-145 on the old one, only one of them gets the exemption for any given period. Couples are treated as a single unit.

2. The 6-year clock resets if you move back in and re-establish the property as your main residence. After re-establishing residence, you can start a fresh 6-year absence period — the rule is six years per period of absence, not six years total ownership.

3. Loan interest deductibility is determined by loan PURPOSE, not the label. If you redrew on the home loan to fund a deposit on another property, the redrew portion's interest is deductible against the OTHER property, not against the rented main residence.

4. There is no minimum stay rule for establishing main residence in the ITAA — the ATO looks at the facts (utilities connected, mail redirected, furniture moved, time spent there). Three days is almost never enough; three months with full setup usually is.

5. Foreign residents can no longer use the main residence exemption when they sell while non-resident (changes from 2017/2019). This is the big trap for Australians selling property after moving permanently overseas — sell BEFORE leaving or plan around the rule, otherwise the whole exemption is lost.

Want to know if you can use the 6-year rule? Book a 30-minute call. We'll look at your property timeline, whether you've made the s 118-145 election correctly, and what (if any) tax exposure you're carrying. TechEdge Accounting is CPA-led, Hawthorn VIC, Australia-wide. This article is general information only. Whether the 6-year rule applies to your specific facts requires a personalised CGT calculation. Please obtain professional advice before relying on this content.