Short answer
Yes. If you rented your property at any point during ownership, the ATO reduces your main residence CGT exemption proportionally. The exempt fraction equals the days you actually lived there divided by total days of ownership.
The rule — ITAA 1997 s118-185
The main residence CGT exemption in Australia is set out in Income Tax Assessment Act 1997, section 118-110. Section 118-185 then introduces the partial-exemption rule that applies when the property was your main residence for only part of the ownership period. Together, these sections produce the proportional formula the ATO uses.
In plain English: the exemption protects the days the property was actually your main residence. It does not protect the days it was anything else — including the days it was rented to a tenant.
The proportional calculation
The ATO uses a simple ratio. The taxable portion of your capital gain is calculated as:
Taxable gain = Total capital gain × (Days NOT main residence ÷ Total days owned)
The exempt fraction is the inverse. If you owned a property for 4,000 days and lived in it as your main residence for 1,000 of those days, then 1,000 ÷ 4,000 = 25 percent of the gain is exempt and 75 percent is taxable. The 50 percent CGT discount may then apply to the taxable portion if you held the property for more than twelve months.
Worked example — Gary’s Mandurah house
Gary bought a property in 2013 and sold it in 2024 — eleven years of ownership. For the first eight years he rented it out. For the final three years he lived in it as his main residence. The capital gain on sale was, say, $220,000.
Three of eleven years was main residence: 3 ÷ 11 = 27 percent. Exempt portion = $60,000. Taxable portion = $160,000. Apply the 50 percent CGT discount: $80,000 added to taxable income. At Gary’s marginal rate plus Medicare, the tax bill landed around $47,000.
What triggers the reduction
- Renting the property to a tenant at any point during ownership.
- Using a part of the home as a dedicated place of business and claiming occupancy expenses.
- Treating another property as your main residence at the same time (you can only nominate one).
- Being a foreign resident at the time you sign the contract of sale — this can deny the exemption entirely.
- Having first used the property to produce income before moving in. The s118-192 market-value reset rule then sets a new cost base from the day you first moved in.
What does not trigger the reduction
- Temporary absences where the property remained your main residence and was not used to produce income — covered by the absence rule in s118-145 (no time limit).
- Absences where the property was rented out for up to six years — but only if you established it as your main residence first, before renting it. This is the “6-year rule.”
- Renovations or short vacancies where the property was not lived in by anyone and not earning income.
- Living overseas while the property remained your main residence and unrented.
The most common trap is in that second bullet. The 6-year rule only helps you if you lived there first. Renting from day one — as Gary did — locks you out of the absence rule permanently for that property.
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