Capital Gains Tax on Your Home in Australia: The Main Residence Exemption and the 50% Discount

Australia's capital gains tax treatment of a home sale rests on two genuinely separate mechanisms that are easy to conflate: a main residence exemption that can eliminate CGT on your home entirely, and a general 50% CGT discount that applies more broadly to assets held over 12 months. Most people who sell a straightforward family home never need to think about the discount at all, because the exemption already covers the whole gain — but the distinction matters for anyone whose home wasn't fully exempt, and a major reform now legislated to take effect from 1 July 2027 is about to change how the discount half of that equation works.

The Main Residence Exemption

Under Subdivision 118-B of the Income Tax Assessment Act 1997, a dwelling is generally fully exempt from CGT if it was your home for the whole period you owned it, you didn't use it to produce assessable income (such as rent), and the land it sits on is 2 hectares or less. A significant, often-missed limitation applies to Australians living abroad: since 7:30pm AEST on 9 May 2017, foreign residents at the time of the sale generally cannot claim the main residence exemption at all, even if the home was genuinely their main residence for the entire period they owned it while living in Australia. A narrow transitional "life events" test applied only to properties already held before that 2017 change and sold by 30 June 2020 — for a sale happening now, a foreign resident at the time of sale is very unlikely to have any main residence exemption available, which is a real trap for Australians who relocate overseas before listing their former home.

The Six-Year Rule

If you move out of your home and rent it out, you can continue treating it as your main residence for CGT purposes for up to six years from when you stopped living there, provided no other property is nominated as your main residence during that period. If you don't rent it out — leaving it vacant instead — the same treatment can continue indefinitely rather than being capped at six years. Moving back in before selling resets the clock for any future absence.

Moving Between Homes

Buying a new home before you've sold the old one is common, and the rules allow both properties to be treated as your main residence for an overlap of up to six months, provided the old home was genuinely your main residence for a continuous period of at least three months within the twelve months before you sold it, wasn't used to produce income during that twelve months if it wasn't otherwise your main residence, and the new property has become your main residence.

The Separate 50% CGT Discount

Distinct from the main residence exemption, section 115-25 of the ITAA 1997 allows individuals and trusts to discount a capital gain by 50% before it's added to assessable income, where the asset was held for at least 12 months. This matters for a home sale specifically when the main residence exemption doesn't cover the whole gain — for example, a property that was rented out for part of the ownership period beyond what the six-year rule protects, or a home partly used for a business. The taxable, non-exempt slice of the gain can still get the 50% discount if the 12-month holding period is met; the two mechanisms are not mutually exclusive. Foreign and temporary residents generally cannot claim the full 50% discount for CGT events happening after 8 May 2012, though an apportioned discount may be available for a period of genuine Australian residency before residency changed.

The 2027 Reform: Indexation Replaces the Discount

Following the 2026-27 Federal Budget, the government introduced the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 into Parliament on 28 May 2026. Once fully in effect, it replaces the 50% CGT discount for individuals and trusts with a system of cost-base indexation (adjusting the original purchase cost for inflation before calculating the taxable gain) combined with a 30% minimum tax rate on net capital gains — but only for gains arising from 1 July 2027 onward. Gains realised before that date keep the current 50% discount under the existing rules, and individuals and trusts disposing of new residential dwellings or affordable housing on or after 1 July 2027 will be able to choose between the old discount and the new indexation-based regime. It's worth being precise about what this reform does and doesn't touch: it changes how the discount is calculated for the taxable portion of a gain — it does not remove or narrow the main residence exemption itself, which remains a separate mechanism. As of this writing, further consultation is still underway on how the new regime interacts with small business concessions, and additional amendments are expected before 1 July 2027.

Sources & Further Reading

• Income Tax Assessment Act 1997 (Cth), Subdivision 118-B (main residence exemption) and section 115-25 (CGT discount)
• Australian Taxation Office, "Eligibility for main residence exemption" and "Main residence exemption for foreign residents"
• Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, introduced 28 May 2026 following the 2026-27 Federal Budget

Practical Next Steps

Before selling, confirm your residency status at the likely time of sale, since that single fact can eliminate the main residence exemption entirely regardless of how long the property was genuinely your home. If part of the gain will be taxable — because of rental use beyond the six-year rule, business use, or non-residency — check whether the 12-month holding period is met for the 50% discount, and keep an eye on the 1 July 2027 transition if settlement might land close to that date. For anything beyond a straightforward, fully exempt sale, a registered tax agent can confirm the numbers before you sign a contract. For the general, worldwide mechanics of how capital gains tax works, see What Is Capital Gains Tax and How Does It Work?

This article is general legal information, not legal or tax advice. Australian tax law is subject to ongoing reform, including changes not yet fully drafted as of this writing — consult a registered tax agent before acting.