When you move out of your home and start renting it out, the property changes its tax status from a main residence (CGT-exempt) to an income-producing asset. This has important consequences for future CGT when you sell.
What Happens at the Point of Conversion?
When a property changes from your main residence to a rental property, the cost base for CGT purposes is effectively re-established at the date of conversion — but only if you plan to use the market value cost base rule.
Under ATO rules, if you first use a dwelling to produce income after it was your main residence, the cost base is taken to be the market value of the property at the date you first rented it out — provided you could have accessed the full main residence exemption up to that point.
This means:
- Any capital gain that accrued while the property was your main residence is effectively sheltered
- Future CGT is calculated from the market value at conversion, not the original purchase price
Example
| Item | Amount |
|---|---|
| Original purchase price (2010) | $400,000 |
| Market value when rented out (2020) | $700,000 |
| Sale price (2025) | $900,000 |
| Cost base for CGT | $700,000 (market value at conversion) |
| Capital gain | $200,000 |
| 50% discount (held >12 months) | ($100,000) |
| Taxable capital gain | $100,000 |
The $300,000 gain from 2010–2020 (while it was the main residence) is not taxable.
The Six-Year Absence Election
Instead of using the market value cost base, you may choose to maintain the main residence exemption for up to six years after you move out. Under this election:
- You continue treating the property as your main residence for CGT purposes
- If you sell within six years, no CGT applies (full exemption)
- You cannot simultaneously claim another property as your main residence
See The Six-Year CGT Absence Rule for the full detail.
Choosing Between the Two Approaches
| Approach | Best If |
|---|---|
| Market value cost base at conversion | Property has increased significantly in value before conversion; you plan to hold as a rental for a long time |
| Six-year absence rule | You plan to sell within six years of moving out; the property hasn’t risen much before conversion |
The better choice depends on your specific timeline and the property’s growth trajectory. A tax agent can model both scenarios.
Valuation at the Time of Conversion
To use the market value cost base, you should obtain a market valuation of the property at the date you first rented it out. Acceptable valuations include:
- A formal property valuation from a registered valuer
- A credible real estate agent’s written assessment (less authoritative but sometimes accepted)
- CoreLogic automated valuation reports
The ATO may request evidence of the valuation if your return is reviewed.
Claiming Rental Deductions After Conversion
Once the property is rented out, you can claim:
- Rental expenses (interest, rates, insurance, property management fees)
- Depreciation on plant and equipment (Division 40)
- Capital works deductions (Division 43, if applicable)
Note: Depreciation claimed reduces the cost base of the property — this will increase CGT when you eventually sell.
Related Articles
- Main Residence CGT Exemption
- The Six-Year CGT Absence Rule
- Partial Main Residence Exemption
- Rental Property Tax Deductions
- Capital Gains Tax Australia hub
Frequently Asked Questions
Do I pay CGT when I convert my home to a rental? Not immediately — CGT arises when you sell, not when you start renting. However, converting the property triggers a change in its tax status, which affects how future CGT is calculated.
What is the cost base when I start renting out my home? If the property was your main residence up to the date you started renting, you can use the market value at the date of first rental as your cost base — effectively sheltering the gain that accrued while it was your home.
Should I get a valuation when I start renting out my home? Yes. A formal market valuation at the time of conversion is important evidence to support the cost base you claim when you eventually sell.
This article provides general tax information for FY2025–26. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.