If I Live in My Home First, Then Rent It Out, How Is My CGT Cost Base Established?
Moving out and renting a home you've lived in can reset your CGT cost base to its market value on the day it first earned income. Here's how that works.
If I live in my home first, then rent it out, how is my CGT cost base established?
If a property was genuinely your main residence for the whole time before you moved out, your original purchase price generally isn’t what you use to work out CGT for the years it earned rent. The ATO calls this the “home first used to produce income” rule — s118-192 of the Income Tax Assessment Act 1997 — and it resets the cost base for the income-producing period to the property’s market value on the day it first started earning income, not the price you originally paid and not the stamp duty or other incidental costs from when you bought it.
The reset applies once three things are all true: you’d only get a partial main residence exemption because the dwelling produced income at some point during your ownership; that income-producing use started for the first time after 7.30pm, Australian Capital Territory legal time, on 20 August 1996; and you would have been entitled to a full exemption if the property had been sold immediately before that first income use. Meet all three, and for CGT purposes you’re treated as having acquired the home — at its market value — on the day that first income use began.
What the published material also confirms is the broad shape around the six-year rule: if you sell while you’re still within the six-year limit for renting out a former main residence, the home can remain fully exempt and the reset may not end up mattering at all. Once you go beyond that limit, the market value recorded on the date the property first earned income becomes the starting point for the rest of the CGT calculation, including the day-based apportionment of the eventual gain.
Why does renting out your home change your cost base?
A home that’s been your main residence for the whole time you’ve owned it, and hasn’t been used to produce income, is generally fully exempt from CGT — you don’t pay tax on the gain when you sell, and you disregard any capital loss, provided it sits on 2 hectares of land or less. That’s the ATO’s full main residence exemption test.
Renting the property out is exactly the kind of change that can break that full exemption. Using a home — or even part of it — to produce income generally means you’re entitled to at most a partial exemption for the income-producing period, worked out through the ATO’s CGT property exemption tool rather than assumed. That’s the reason a cost base needs to be pinned down for the point your home stopped being purely a residence: from there, at least part of any future gain can become taxable.
What is the “home first used to produce income” rule?
The ATO has a named rule for exactly this situation, set out in s118-192 of the Income Tax Assessment Act 1997. Three conditions all have to be met before the reset applies:
- you’d only get a partial main residence exemption, because the dwelling was used to produce assessable income at some point during your ownership (s118-192(1)(a));
- that income-producing use started for the first time after 7.30pm, Australian Capital Territory legal time, on 20 August 1996 (s118-192(1)(aa)); and
- you would have been entitled to a full exemption if the relevant CGT event — generally the sale — had happened immediately before that first income use (s118-192(1)(b)).
Meet all three, and s118-192(2) treats you as having acquired the dwelling, for CGT purposes, at its market value on that first-income date. The ATO’s guidance on using your home for rental or business covers this scenario and confirms you can’t use the CGT discount if you sell within 12 months of that first income-producing use.
When doesn’t the rule apply?
The ATO sets out four situations where the reset isn’t in play:
| Situation | Why the reset doesn’t apply |
|---|---|
| The property produced income from the day you acquired it | There’s no partial-exemption gap to reset |
| You inherited a dwelling that was the deceased’s main residence and sell within 2 years | A separate inherited-dwelling exemption covers this instead |
| You choose to keep treating the property as your main residence after moving out, and it stays fully exempt | The rule only bites where you’d get a partial exemption, not a full one |
| You don’t meet the criteria for any partial exemption at all — for example you were a foreign resident when you sold, or claimed the exemption on another property for the same period | There’s no partial exemption for the rule to modify |
Do you need a valuation, and when?
Yes. The ATO requires a market valuation of the home from the point it first starts being used for rental or business, where that’s after 20 August 1996 — the same date the reset itself hinges on. That valuation is what fixes the reset cost base, so it needs to reflect the value at the change-of-use date rather than being reconstructed well after the fact. How that’s pinned down in practice is covered in the records section below.
What if only part of your home produced the income?
Where you kept living in the home and only part of it earned income — a rented room, a home business, a granny flat — the ATO uses a different method instead of the whole-of-property day-based apportionment described above. It’s based on floor area, not just time: work out the gain or loss using the home’s market value when it first produced income, then work out what share of the floor area was set aside to produce that income, and multiply the two together. If the income-producing use stopped before you sold, apportion further by the number of income-producing days over the total days from that first income use through to the sale. A registered tax agent can confirm which of these two methods — whole-of-property or floor-area — applies to your own situation.
How does the six-year rule change this?
Renting out a former main residence doesn’t mean losing the exemption the moment a tenant moves in. Under the ATO’s absence rule — commonly called the six-year rule — you can keep treating a former home as your main residence for CGT purposes for up to six years at a time while it’s producing income, or indefinitely if it isn’t earning income at all. The ATO’s guidance on treating a former home as your main residence sets out the tests.
The six-year limit resets every time you move back in and then move out again. Generally you can’t treat any other property as your main residence for the same period, apart from a brief overlap of up to six months when you’re moving between homes.
Sell within that six-year window, and provided the other conditions are met, the home can still be treated as fully exempt — so the market-value reset may never end up affecting your tax bill. Go beyond six years of income-producing use, though, and the reset applies: the cost base becomes the property’s market value on the day it first earned income, with the resulting gain or loss apportioned on a day-based basis from there.
That day-based apportionment runs from the reset date, not your original purchase date. The ATO’s formula divides the number of days the home wasn’t your main residence — the days over the six-year limit — by the total number of days in your ownership period, and that ownership period is counted from the day you’re treated as having acquired the property: the day it first earned income, not the day you originally settled on it.
| If you sell… | Cost base position |
|---|---|
| Within the 6-year limit, other conditions met | May stay fully exempt; reset may not apply |
| Beyond the 6-year limit | Resets to market value; day-based apportionment |
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
What happens once the reset property is an ordinary rental?
From the reset date onward, the property is generally taxed like any other investment property for CGT purposes. Hold it for at least 12 months — excluding both the day you acquired your interest and the day of the eventual CGT event — as an Australian resident individual, and you can generally reduce the taxable portion of the gain by 50%. The ATO’s CGT discount rules apply this after any capital losses are taken into account, for CGT events before 1 July 2027 (as at July 2026).
None of that changes the reset cost base itself — it simply becomes the opening figure the rest of the CGT calculation, including any discount, is worked out from.
What records do you need to establish the market value?
A cost base you can’t prove is a cost base you can’t use, so the market valuation dated to when your home first earned income is the document this whole situation turns on. Where that date falls after 20 August 1996, the ATO’s record-keeping rules for property CGT specifically call out recording the property’s market value at that time.
Alongside that valuation, keep the same paper trail you’d keep for any property: the original contract of sale and settlement statement, stamp duty and conveyancing receipts, and invoices for any capital improvements made before or after the change of use. Records need to be kept for the whole period you own the property, plus at least 5 years after you dispose of it (as at July 2026).
Does this work the same way if you’ve sold Brix in your home instead?
Not necessarily — and this is genuinely unresolved territory rather than a simple extension of the rules above. The main residence exemption is framed around disposing of your ownership interest — your legal or equitable interest — in the dwelling. A co-owner, for example, returns a capital gain or loss in proportion to their ownership share as recorded on the title.
A Brix works differently. It’s a fractional economic interest in a property — a financial product under the Corporations Act, not a transfer of legal or beneficial ownership of the land — and selling one doesn’t change who’s on title or affect your right to keep living in the home. Because of that structural difference, no ATO guidance currently addresses whether selling Brix in your own home while you continue living there is a part-disposal of your main residence eligible for the exemption, a disposal of a separate financial-product asset sitting outside it, or something else again.
This guide doesn’t assert either answer, because neither is published. Under the MyBrix Product Disclosure Statement current as at July 2026 (version 4.0), each property is divided into 10,000 Brix representing all of its economic benefits, and the owner remains the registered legal owner throughout — selling Brix doesn’t touch that. Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
For the fundamentals behind all of this, see our guide to capital gains tax on property in Australia.
