The 2026 Federal Budget, handed down on July 11, quietly rewrote the rules for Australians working overseas who sell their home back home. Starting from July 1, 2027, the main residence capital gains tax (CGT) exemption will be severely restricted for expats, stripping the tax-free status on property sales unless the owner satisfies a new "genuine connection" test. For mortgage borrowers, this means a potential six-figure tax bill on what was once a tax-free gain, directly reducing the equity available for a future home purchase or refinance. If you are planning a stint overseas, this change demands an immediate review of your property ownership and borrowing strategy.
The CGT Trap: What Changed and Who Is Affected
The Australian Tax Office has long allowed homeowners to treat their principal place of residence as CGT-exempt, even if they temporarily rent it out while working abroad. Under the previous rules, an individual could claim the full exemption for up to six years if the property was rented, or indefinitely if it remained vacant. The 2026 Budget slams that door shut for most expats.
From July 1, 2027, the main residence exemption will only apply if the property was your home for a continuous period of at least two years in the four years immediately before the sale, and you must have been an Australian resident for tax purposes for the entire ownership period. For those who move overseas for work, this effectively means the exemption evaporates after a short absence. The Treasury estimates this will bring an additional 12,000 property sales into the CGT net each year, raising $1.8 billion over four years.
Consider a concrete example: Sarah, a Sydney-based engineer, buys a home for $900,000 in 2025. In 2028, she accepts a three-year contract in Singapore. She sells the property in 2031 for $1.4 million. Under the old rules, she would pay zero CGT. Under the new rules, because she was not an Australian resident for the full ownership period, she faces CGT on the full $500,000 gain—minus the cost base indexation—potentially costing her over $130,000 in tax. That is money she planned to use as a deposit on her next home.
The change targets what the government calls "property speculation by non-residents," but it sweeps up genuine professionals on temporary overseas assignments. The Budget papers explicitly state that "temporary absence" no longer justifies the exemption unless the owner maintains Australian residency. This is a fundamental shift from decades of settled law.
Mortgage Implications: How CGT Bills Cripple Borrowing Power
For borrowers, the immediate concern is equity. The CGT liability arises in the same financial year as the sale, meaning you must pay the ATO before you can use the proceeds for a new deposit. This creates a cash-flow crunch that can derail a planned home purchase or refinance. Lenders assess your serviceability based on net proceeds after tax, so a surprise CGT bill directly reduces your borrowing capacity.
Arrivau's mortgage brokers have already fielded inquiries from expat clients caught in this trap. A typical scenario: a family returns from London, sells their former Sydney home for a $600,000 gain, and expects to use that as a 20% deposit on a $3 million property. Under the new rules, they owe roughly $180,000 in CGT. Their net deposit drops to $420,000, meaning they can now only afford a $2.1 million property—a 30% reduction in purchasing power. For those who have already signed contracts, this is a crisis.
The change also affects existing mortgage holders. If you are currently renting out your Australian home while on a two-year overseas assignment, your lender may view the property as an investment. When you sell, the CGT bill reduces the equity you can inject into your next loan. Some lenders, particularly the major banks, are already adjusting their LVR (loan-to-value ratio) calculations for expat borrowers, requiring larger deposits to account for potential tax liabilities.
Importantly, the new rules do not apply to properties sold before July 1, 2027, or to those who can prove they maintained Australian residency under the "ordinary concepts" test. But for anyone planning a move in the next 12 months, the clock is ticking. You may need to sell before the deadline to preserve the exemption, or restructure your ownership to hold the property through a trust or company—though that introduces its own tax complexities.
For a deeper dive into how lenders treat expat income and assets, see Arrivau's guide to expat mortgage applications. It covers the specific documentation and serviceability tests used by major lenders for non-resident borrowers.
Strategies to Mitigate the CGT Blow
There are several pathways to reduce or defer the CGT impact, but they require proactive planning. None are guaranteed, and each carries trade-offs.
1、Sell before the deadline: If you are already overseas or planning a move in 2026, consider selling your Australian home before July 1, 2027. This locks in the old exemption rules. However, selling in a falling market—Sydney and Melbourne prices have softened 3-4% year-on-year as of June 2026—may net you less than waiting. You must weigh the tax saving against the market risk.
2、Maintain Australian residency: The exemption still applies if you remain an Australian resident for tax purposes, even if you live abroad. This requires passing the "residency test," which considers factors like your permanent place of abode, family location, and economic connections. The ATO has become stricter since 2023, so this is harder to claim. You may need to retain a home in Australia, keep your bank accounts, and visit frequently. For many professionals, this is impractical.
3、Use the 50% CGT discount: If you have owned the property for more than 12 months, you qualify for the 50% discount on the taxable gain—but only if you were a resident when the gain accrued. The Budget does not change this, but it does require careful apportionment. For example, if you owned the home for 10 years and lived overseas for the last 3, only the gain during the non-resident period is taxable (using a market value at the date you left). This "split method" can reduce the bill, but you need a valuation from a qualified valuer.
4、Consider a trust or company structure: Holding your Australian property through a discretionary trust or a company can change the CGT outcome, but it also removes the main residence exemption entirely. This is typically only beneficial for high-value properties where the ongoing costs are offset by tax planning. It is not a DIY solution—consult a tax accountant.
5、Negotiate with your lender: If you are caught short on deposit, some lenders offer "equity release" products that allow you to borrow against the property before sale, using the proceeds to pay the CGT. This is risky because it increases your debt, but it can bridge the gap. For more on this, see Arrivau's refinance strategies for property sellers.
Each strategy has a cost-benefit profile. The worst approach is doing nothing and assuming the old rules still apply. The ATO will not offer grace periods.
FAQ
Q: Does the new CGT rule apply if I am only overseas for one year?
A: Yes, it applies to any period of non-residency after July 1, 2027, regardless of duration. Even a one-year assignment could trigger the tax if you sell after that date. The only exception is if you can prove you remained an Australian resident under the ordinary concepts test—which is difficult for a full year abroad.
Q: Can I claim the exemption if I rent out my home while overseas?
A: Under the old rules, you could rent for up to six years and still claim the exemption. Under the new rules, renting out the property while you are a non-resident will almost certainly disqualify the exemption, unless you owned it for at least two continuous years as your home in the four years before sale and remained a resident.
Q: How does this affect my mortgage application if I am an expat?
A: Lenders will assess your net proceeds after estimated CGT. If you cannot show a binding contract that proves the tax is paid, they may reduce your borrowing capacity. Some lenders now require a tax clearance certificate or a letter from your accountant estimating the liability. For detailed guidance, see Arrivau's expat home loan checklist.
Q: Is there a grandfathering provision for properties bought before the Budget?
A: No. The change applies to all sales after July 1, 2027, regardless of when the property was purchased. There is no grandfathering. The only transition is that the old rules remain in effect for sales before that date.
Q: What if I sell to a family member at a discount?
A: The ATO will still assess the sale at market value. Selling to a related party at a below-market price does not reduce the CGT—it may trigger additional stamp duty and anti-avoidance provisions. This is not a viable strategy.
Sources and Further Reading
- Australian Treasury. "Budget 2026-27: Budget Paper No. 2 – Part 1: Revenue Measures." July 11, 2026. Available at: https://budget.gov.au/2026-27/content/bp2/index.htm
- Australian Taxation Office. "Main Residence Exemption – Changes for Foreign Residents." ATO website, updated July 12, 2026. Available at: https://www.ato.gov.au/individuals/capital-gains-tax/main-residence-exemption/
- KPMG Australia. "Federal Budget 2026: Property Tax Reforms." KPMG Tax Alert, July 11, 2026. Available at: https://home.kpmg/au/en/home/insights/2026/07/federal-budget-2026-property-tax.html
- Property Council of Australia. "Budget Submission 2026-27: Housing Supply and Tax Reform." July 2026. Available at: https://www.propertycouncil.com.au/submissions
- Arrivau. "Expat Mortgage Guide: How to Get a Home Loan While Living Overseas." Arrivau, updated June 2026. Available at: /rates/expat-mortgage-guide/
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