Moving Into a Rental Property to Minimise Capital Gains Tax in Australia

If you’re wondering whether you can move into your rental property to help minimise capital gains tax, you’re not alone. Many Australian investors are exploring ways to reduce their tax burden legally when selling a property, and moving into an investment property is a strategy that can work, provided you have the right understanding.

In this guide, the team at Ausfirst Lending Group will explain what happens if you live in your investment property, how long you might need to live there, and whether you still pay CGT if you move into your rental property. We’ll also touch on real-world scenarios, critical rules you need to know, and common pitfalls to avoid.

Can Moving Into a Rental Property Help Reduce Capital Gains Tax?

Yes, moving into your rental property could help you reduce or even avoid Capital Gains Tax (CGT), but certain conditions must be met.

In Australia, if a property becomes your main residence, you may qualify for the main residence exemption, which can wipe out some or all of the CGT payable when you eventually sell. This means the property must genuinely be used as your home, not just “on paper” but in real life.

What makes it your main residence?

The Australian Taxation Office (ATO) looks at several factors, such as:

• Whether you and your family live there
• Whether your personal belongings are kept at the property
• Whether your postal address and voter registration have been updated
• The length of time you live there
• Whether you have connected services like electricity and internet in your name

Simply moving in for a few weeks without any real lifestyle change might not satisfy the ATO. Your living arrangement must clearly show that the property is your actual home.

How Long Should I Live in My Investment Property to Minimise CGT?

It’s a key question for many investors: how long must you live in an investment property to help reduce your capital gains tax?

Interestingly, there is no specific minimum period written into law. However, based on case law and ATO guidance:

• Living in the property for at least 6 months is often seen as a safe minimum to demonstrate genuine use.
• Living there for 12 months or longer further strengthens your claim if you’re audited.
• Shorter stays (less than 6 months) could still qualify, but you would need very strong evidence to prove the property was genuinely your main residence.

Factors like changing your driver’s licence address, lodging tax returns from that address, and making lifestyle changes (such as enrolling children in local schools) are helpful in proving your case, especially if you sell within a relatively short period.

Important tip: If you live there briefly but have already planned to sell quickly, it could weaken your claim for the exemption. The ATO may view it as a tax-driven move rather than a genuine change of residence.

Do I Pay CGT if I Move Into My Rental Property?

Moving into your rental property could help reduce your Capital Gains Tax (CGT), but it does not automatically wipe out your tax obligations. In Australia, when a property has been used to produce income (like rental income), CGT still applies to the period it was rented out. However, by moving in and making the property your main residence, you may be eligible for a partial CGT exemption.

How a Partial CGT Exemption Is Calculated

The ATO calculates CGT based on how long the property was used to generate income compared to how long it was your main residence. The longer you live in the property after moving in, the smaller the taxable portion of your capital gain could become.

Example Scenario:

• You bought an investment property for $500,000.
• You rented it out for 4 years.
• Then you moved in and lived there for 2 years.
• You sold it for $700,000.

The capital gain is $200,000 ($700,000 – $500,000).

Because the property was rented for 4 out of 6 years (total ownership time), two-thirds (4/6) of the gain would be subject to CGT:

• Taxable Capital Gain = $200,000 × (4/6) = $133,333.

If you held the property for more than 12 months, you could also be eligible for the 50% CGT discount, cutting the taxable amount to around $66,666.

This shows that moving into your rental property can substantially reduce how much CGT you pay, but it usually will not eliminate it altogether.

Important Considerations

When it comes to reducing CGT after moving into a rental property, a few extra details can make a real difference. Here’s what you’ll want to keep in mind.

Depreciation Adjustments

If you claimed depreciation deductions while renting out the property, part of those deductions might be added back (known as “depreciation clawback“), increasing your assessable gain.

Record Keeping Is Vital

You’ll need good records of when the property was rented, when you moved in, and possibly a valuation at the time you moved in if the ATO requires it later.

Partial vs Full Exemption

Moving in after renting only qualifies you for a partial exemption. To get a full exemption, the property must have always been your main residence.

What Happens If I Live in My Investment Property?

When you move into your rental property and make it your main residence:

• You may be able to claim the main residence exemption for the time you live there.
• If you later move out and rent the property again, you may qualify for the 6-year rule.
• Your property’s CGT exposure could be significantly reduced when you sell.
• Rental-related deductions (like depreciation or borrowing costs) stop from the time you live there.

This change can have a major impact on your future tax situation, so it’s important to get it right.

Can You Move Back Into a House to Avoid Capital Gains Tax?

Yes, you can move back into a house you previously rented out to help reduce your CGT bill, but it needs to become your genuine home again.

Here’s how it could work:

• If you originally lived in the property, moved out and rented it, then moved back in, you could either:
  • Re-establish the main residence exemption from the time you move back in, or
  • Continue using the 6-year rule if you have never nominated another main residence.
• If you move back in and live there for a genuine period, it can greatly strengthen your CGT position when you sell later on.

However, any capital gain relating to the period when the property was rented out before you moved back may still be taxable. A partial exemption is often applied based on the time ratio of use.

Important Insights to Know Before Moving In

Before you move into your investment property, there are a few important points to consider that could affect your Capital Gains Tax outcome.

No automatic exemption

Simply living in the property doesn’t automatically wipe out CGT. Proper records and a genuine move-in are essential.

Partial exemption is common

Most scenarios where an investment property is later lived in will result in a partial CGT exemption, not a full one.

6-Year Rule could apply

If you move out again after living in the property, the 6-year rule may allow you to rent it out for up to 6 years and still treat it as your main residence for CGT purposes.

Property valuation may help

When you move into the property, getting a professional valuation can be useful. It provides a market value “reset” that can help you calculate future CGT more accurately.

Moving Into Your Investment Property to Manage CGT

Moving into your rental property can be a smart way to manage or reduce Capital Gains Tax, but it requires careful planning. Whether you can fully avoid CGT may depend on how long you live there, how the property was used before and after, and whether you meet all ATO requirements for the main residence exemption.

If you’re thinking about taking this step, it’s important to plan ahead:

• Understand how your time living there will affect CGT calculations
• Keep thorough records (addresses, bills, electoral roll, etc.)
• Speak with a property-savvy tax adviser or mortgage broker to help optimise your outcome

The more genuinely you treat the property as your home, the stronger your position could be when claiming the exemption.

With the right approach, moving into your investment property may significantly improve your future tax outcome and support your long-term financial goals.

Need help exploring your options? The mortgage brokers at Ausfirst Lending Group are here to make it simpler. Get in touch today and let’s find the right strategy for your property goals.