For educational purposes only. Not tax, legal, or financial advice. Tax laws change frequently. Consult a registered tax agent or CPA for your specific situation.
Accidental landlords must declare all rental income on their tax return from the first year a tenant pays rent. When converting a former main residence to a rental, the CGT cost base resets to market value at the date the property first produces income (for properties acquired after 20 August 1996). The six-year absence rule allows you to maintain the main residence exemption for up to six years while the property is rented, provided no other property is nominated as your main residence during that period. Residential rent is input-taxed for GST purposes: no GST on rent, no input tax credits on expenses.
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You inherited a property you cannot sell yet, moved interstate for work and kept the old house, or ended up with a rental after a relationship breakdown. None of these make you a property investor by choice, but the ATO treats you as one from the moment a tenant moves in. Rental income must be declared in the year tenants pay rent, the property's cost base resets to market value at the date of first rental use, and the six-year absence rule is the single most valuable exemption available to people who never planned to be landlords.
The reality this serves
People who became landlords by circumstance rather than investment strategy. Includes adult children who inherited a parent's home and cannot sell in the current market, separated or divorced couples where one party retains the family home and rents part or all of it, workers relocated interstate or to regional areas who kept their city property, and retirees who moved to a smaller home without selling the original. Many accidental landlords are positively geared (minimal or no mortgage after years of repayments) and unfamiliar with rental income reporting, depreciation schedules, or CGT calculations.
Market value reset at first rental use
When you convert your main residence to a rental property, the cost base for CGT purposes resets to the market value on the date the property first produces income. This applies to properties acquired after 20 August 1996. Any capital gain that accrued while it was your home is exempt; only the gain after conversion is subject to CGT when you eventually sell. A professional market valuation at the conversion date is essential. Without one, the ATO may substitute a lower value, increasing your taxable gain on sale. Keep the valuation report permanently: you may not sell for 10 or 20 years, but the conversion-date value is the anchor for your entire CGT calculation. For properties acquired before 20 August 1996 (pre-CGT assets), different rules apply. Under current law, pre-CGT properties are entirely exempt from CGT on gains accrued before 20 September 1985 and may have partial exemptions depending on acquisition and use dates.
When a main residence is first used to produce income, the first element of its cost base is its market value at that date, and prior capital gains are disregarded.(ITAA 1997 s 118-192 (market value substitution rule))
The six-year absence rule
You can continue to treat your former home as your main residence for CGT purposes for up to six years while it is rented out, provided you do not nominate another property as your main residence during the same period. If the property is left vacant (not rented), there is no time limit on the absence. The six-year clock resets each time you move back in, even briefly, and then move out again. If you rent the property beyond six continuous years in a single absence, CGT applies only to the portion of the ownership period exceeding the six-year limit. The critical constraint: you cannot claim two main residences simultaneously. If you buy a new home and nominate it as your main residence, the absence rule for the old property ends on the day you make the new nomination. Many accidental landlords accidentally forfeit this exemption by not understanding that the new home nomination kills the old exemption.
A taxpayer may treat their former main residence as their main residence for up to six years while it is income-producing, provided no other dwelling is treated as their main residence.(ITAA 1997 s 118-145 (absence from main residence))
Depreciation on existing properties (second-hand restrictions)
Since 9 May 2017, residential property investors who purchase a property (or acquire an interest, including by inheritance in some cases) cannot claim depreciation on existing (second-hand) plant and equipment items already in the property. This restriction covers items like carpet, blinds, hot water systems, air conditioning units, and kitchen appliances that were installed by a previous owner. Properties or depreciating assets acquired before 7:30pm AEST on 9 May 2017 are grandfathered and retain full depreciation claims on second-hand items. A quantity surveyor report identifies depreciable assets, but for post-May-2017 acquisitions, only newly installed items (purchased and installed by you) generate depreciation deductions. Building (Division 43) capital works deductions are unaffected by the second-hand restriction. The building structure itself can be depreciated at 2.5% of construction cost per year (for properties built after 15 September 1987), regardless of when you acquired the property.
Purchasers of residential rental properties after 9 May 2017 cannot claim depreciation on second-hand plant and equipment. Building capital works deductions (Division 43) remain available.(ITAA 1997 s 40-27 (second-hand depreciating asset restriction); ITAA 1997 Division 43 (capital works))
Declaring rental income on your first tax return as a landlord
All rental income must be declared in the tax year tenants pay rent. This includes regular rent, bond money retained at end of tenancy, insurance payouts for lost rent or property damage, and letting fees charged to tenants. Income is reported based on legal ownership percentages: if you own 50% of the property, you declare 50% of the gross rent. Deductible expenses include property management fees, council rates, water charges (landlord share), building and landlord insurance premiums, loan interest on the rental property, repairs and maintenance (not capital improvements), and advertising for tenants. Gross rent must be reported first, then deductions claimed separately. The ATO requires detailed property information: acquisition date, purchase price, date of first rental income, ownership percentage, and weeks rented versus weeks available for rent. Residential rent is input-taxed under GST law. No GST is charged on residential rental income and landlords cannot claim input tax credits on related expenses. This differs from commercial property, where GST applies to rent and full input credits are available.
Residential rental income is assessable in the year received. Residential rent is input-taxed for GST purposes (no GST charged, no input credits claimable).(ITAA 1997 s 6-5 (assessable income); A New Tax System (GST) Act 1999 s 40-35 (input-taxed residential rent))
Allowable expenses in context
Accidental landlords claim the same categories as deliberate investors, but the typical profile differs. Many own properties outright or have small remaining mortgages, making them positively geared where interest deductions are minimal. Deductible rental expenses: property management fees (fully deductible), council rates, water charges (landlord share), building and landlord insurance, loan interest on the rental property, repairs and maintenance (fixing existing items, not improvements), pest control, gardening and lawn-mowing for tenant-occupied properties, travel to the property for inspections (limited to three deductible trips per year for most landlords under ATO guidance), and depreciation on eligible assets. Capital expenses (not immediately deductible): renovations, structural improvements, additions. These are added to the cost base for CGT purposes or depreciated under Division 43 capital works (2.5% per year for eligible construction costs). NOT deductible: your own mortgage repayments (only the interest component is deductible, not principal), expenses during periods the property is not available for rent, private portions of expenses on a property partly used for private purposes, and body corporate levies that relate to capital works (special levies for major building works are capital, not revenue).
Support schemes
Main residence exemption (full)
Eligibility: Property was your main residence for the entire ownership period. No income produced from the property during that time. One main residence per person (or couple) at any given time.
Six-year absence rule (partial main residence exemption)
Eligibility: Former main residence, rented for up to 6 years in a single absence period. No other dwelling nominated as main residence during that absence. Resets on moving back in.
50% CGT discount (individuals)
Eligibility: Asset held for at least 12 months before disposal. Available to individuals and trusts (not companies). Applies to properties acquired after 20 September 1985.
Negative gearing (current rules to 30 June 2027)
Eligibility: Any taxpayer with rental property expenses exceeding rental income. Available for properties acquired before 7:30pm AEST on 12 May 2026 (grandfathered indefinitely). For properties acquired after that date: losses quarantined to property income from 1 July 2027.
Frequently asked questions
I inherited my parent's house and started renting it out. Do I need a market valuation?+
Yes, and this is one of the most important steps you can take early. When an inherited property is first used to produce income, the cost base for CGT purposes is its market value at the date of death (if the deceased acquired it before 20 September 1985 and it was their main residence) or the deceased's original cost base (if acquired after that date). A professional valuation at the date of first rental use establishes the benchmark. Without it, the ATO may apply a lower estimated value, increasing your eventual CGT bill. Commission the valuation before the first tenant moves in.
Can I claim the six-year absence rule if I bought a new home?+
Only if you do not nominate the new home as your main residence during the absence period. The moment you nominate another dwelling as your main residence, the six-year clock on the old property stops. You cannot claim two main residences simultaneously. If you buy a new home and want to preserve the exemption on the old one, do not nominate the new property. This means any future sale of the new home will not benefit from the main residence exemption for the overlapping period. Get advice before nominating: the decision is irreversible for each ownership period.
I have been renting my old home for eight years. How is CGT calculated?+
The six-year rule covers the first six years of absence. The remaining two years are not covered. CGT is apportioned by time: the gain attributable to the two years beyond the six-year limit is taxable, and the rest is exempt. For example, if total ownership was 12 years (4 years as main residence plus 8 years rented), the exempt period is 10 years (4 years residence plus 6 years covered absence) and the taxable period is 2 years. The taxable capital gain is (2/12) of the total gain. The 50% CGT discount applies if held over 12 months.
How do the 2027 negative gearing changes affect me if I already own my rental?+
If you acquired the property (or entered into a contract to acquire it) before 7:30pm AEST on 12 May 2026, your negative gearing rights are grandfathered indefinitely. You can continue to offset rental losses against your wages and other income under the existing rules until you sell or dispose of the property. The new quarantining rules (losses restricted to property income only) apply only to established residential properties acquired after that date and time. Accidental landlords who converted their home to a rental before 12 May 2026 are unaffected by the restriction.