Main Residence vs Rental Property: When Is a Market Valuation Required for CGT?
Property & Tax Update |
The Common Misunderstanding
When a residential property changes between a main residence and a rental property, many owners assume that a market valuation is required whenever its use changes.
This is not always correct.
Under Australian capital gains tax (CGT) rules, the treatment depends on whether the property was originally used as a main residence or a rental property.
| Change in Property Use | General CGT Treatment |
|---|---|
| Main residence → Rental property | Market value at the first income-producing date becomes the CGT cost base where section 118-192 applies. |
| Rental property → Main residence | The original cost base remains, and a partial CGT exemption is generally calculated using time apportionment. |
Understanding this distinction can prevent incorrect CGT calculations and unnecessary valuation costs.
1. Main Residence Converted to Rental Property — The Market Value Rule
Section 118-192 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a special market-value rule where a property that previously qualified for the full main residence exemption is first used to produce assessable income.
Broadly, the rule applies where:
- The property was first used to produce income after 20 August 1996.
- The property would have qualified for the full main residence exemption immediately before its first income-producing use.
- The property is entitled to only a partial main residence exemption when eventually sold.
Where these conditions are satisfied, the property is deemed to have been acquired at its market value on the date it was first used to produce income.
Example A — Home Converted to Investment Property
Nick purchased a property in 2015 for $500,000 and immediately occupied it as his main residence.
In 2020, he moved out and rented the property. Its market value at that time was $800,000.
Nick sold the property in 2025 for $1,000,000.
Assume the six-year absence rule is not applied and section 118-192 applies.
| Item | Amount |
|---|---|
| Original purchase price in 2015 | $500,000 |
| Market value when first rented in 2020 | $800,000 |
| Sale price in 2025 | $1,000,000 |
| Capital gain before other adjustments | $200,000 |
The capital gain is calculated using the $800,000 market value rather than the original purchase price.
Key point: A market valuation at the first income-producing date is required to establish the CGT cost base where section 118-192 applies.
2. Rental Property Converted to Main Residence — No Market Value Reset
The treatment is different when an investment property subsequently becomes the owner's main residence.
Moving into a rental property does not reset its CGT cost base to market value.
Instead, the original cost base generally remains applicable, and the capital gain is apportioned under section 118-185 according to the period during which the property was not the owner's main residence.
Example B — Investment Property Converted to Main Residence
Angela purchased an investment property in 2015 for $500,000.
She rented the property for five years before moving into it as her main residence in 2020.
The property was worth $800,000 when she moved in.
Angela sold the property in 2025 for $1,000,000.
Assume the rental and main residence periods contain equal numbers of days.
| Item | Amount |
|---|---|
| Original purchase price | $500,000 |
| Market value when moving in | $800,000 |
| Sale price | $1,000,000 |
| Total capital gain | $500,000 |
| Rental period | 50% |
| Taxable capital gain before CGT discount | $250,000 |
The $800,000 market value when Angela moved in is not used.
Instead:
$500,000 × 50% = $250,000
Key point: When a rental property becomes a main residence, a market valuation at the conversion date is unnecessary. The partial exemption is calculated using ownership days rather than changes in market value.
3. The Six-Year Absence Rule — When Is a Valuation Needed?
Under section 118-145, an owner who moves out of their main residence may continue treating the property as their main residence for CGT purposes.
Where the property is rented, the absence rule can generally apply for up to six years during a qualifying period of absence.
If the property is sold within that period and qualifies for the full main residence exemption, no market valuation is needed for calculating CGT.
However, the situation becomes more complicated when the owner purchases and moves into another main residence.
Example C — Six-Year Rule Ends When a New Main Residence Is Chosen
Leo purchased a property in 2016 and occupied it as his main residence.
In 2020, he moved out and rented the property. Its market value was $800,000.
Leo continued treating the property as his main residence under the six-year absence rule.
In 2024, he purchased and moved into a new property and chose to treat the new property as his main residence from that time.
Leo retained the original rental property until 2028, when he sold it for $1,200,000.
| Year | Event | Market Value |
|---|---|---|
| 2020 | Original home first rented | $800,000 |
| 2024 | New main residence acquired | $1,100,000 |
| 2028 | Original property sold | $1,200,000 |
Assume section 118-192 applies, the original property is treated as Leo's main residence until 2024, and the two rental periods contain equal numbers of days.
Step 1 — Determine the CGT cost base
The market-value reset occurs in 2020, when the property was first used to produce income.
CGT cost base: $800,000.
Step 2 — Calculate the total capital gain
$1,200,000 − $800,000 = $400,000.
Step 3 — Apply the partial main residence exemption
- 2020–2024: Four years treated as Leo's main residence under the six-year absence rule.
- 2024–2028: Four years not treated as his main residence.
Taxable proportion: 4 ÷ 8 = 50%.
Taxable capital gain: $400,000 × 50% = $200,000, before other cost-base adjustments and any applicable CGT discount.
Why Isn't the 2024 Market Value Used?
Although the property increased in value from $800,000 to $1,100,000 during the four-year exempt period, the six-year absence rule does not move the valuation date from 2020 to 2024.
The partial exemption is calculated based on the relevant ownership days, not the actual increase in property value during each period.
Consequently, the taxable capital gain is $200,000 rather than the $100,000 increase in value between 2024 and 2028.
Key point: The six-year absence rule can preserve the main residence exemption during a rental period, but it does not postpone the market-value reset date under section 118-192.
4. CGT Market Valuation Report Requirements
Where section 118-192 applies, the property owner should obtain a reliable market valuation at the date the property was first used to produce income.
A suitable valuation report should include:
- Effective valuation date: The date the property was first used to produce income, which may be when it was first genuinely available for rent rather than the first tenant's occupancy date.
- Property details: Address, land area, building characteristics and condition at the valuation date.
- Market value: A clearly stated market value supported by comparable property sales and an appropriate valuation methodology.
- Valuer's details: Name, qualifications, report date and any significant assumptions.
Is a Certified Valuer Required?
The legislation does not universally require a Certified Practising Valuer (CPV) report.
However, an independent valuation prepared by a qualified property valuer is generally the most reliable evidence for CGT purposes.
An agent's appraisal or online property estimate may not provide sufficient supporting evidence, particularly where the capital gain is significant.
Can a Retrospective Valuation Be Obtained?
Yes.
If a property was first rented several years ago, a valuer can prepare a retrospective valuation using historical market evidence and the property's condition at the relevant date.
For example, if a property was first rented in 2020 but sold in 2026, the owner can obtain a retrospective valuation with an effective date in 2020.
It is generally preferable to obtain the valuation close to the conversion date, while supporting information remains readily available.
5. Practical Checklist
Before calculating CGT or obtaining a valuation, property owners should confirm:
- Whether the property was originally a main residence or rental property.
- The date it was first used to produce income.
- Whether section 118-192 applies.
- Whether the six-year absence rule provides a full or partial exemption.
- Whether a new main residence has been acquired during the absence period.
- Whether a market valuation or time apportionment is required.
- Whether the original acquisition costs, improvements, holding costs and selling expenses have been correctly considered.
Conclusion
A change between main residence and rental property does not always require a market valuation.
Main residence → Rental property: A market-value reset generally applies under section 118-192 where its conditions are satisfied.
Rental property → Main residence: The original cost base remains applicable, and the partial CGT exemption is generally calculated using time apportionment.
The six-year absence rule can preserve the main residence exemption while a former home is rented. However, it does not change the date of the market-value reset where section 118-192 applies.
Understanding these rules helps property owners avoid unnecessary valuation costs and incorrect CGT calculations.
References
- Income Tax Assessment Act 1997, sections 118-110, 118-145, 118-185 and 118-192.
- Federal Register of Legislation — Income Tax Assessment Act 1997
- ATO — Using your home for rental or business
- ATO — Market valuation of assets
This article provides general information only. Actual CGT calculations depend on the taxpayer's circumstances, applicable legislation and precise ownership dates.