Updated 10 October 2026
The main residence exemption covers your dwelling and up to two hectares of land, just under five acres, used privately with it. Own more than that and the excess is taxable when you sell. Which two hectares you claim, and how the price is split between exempt and taxable land, is a valuation exercise that can swing the tax bill dramatically.
At a glance
- The main residence exemption covers the dwelling plus adjacent land up to two hectares in total, including the land under the house
- On a larger block, you choose which two hectares to claim, provided the land under the dwelling is included
- The split between exempt and taxable land should follow value, not just area, and on most properties the two are very different
- Land sold separately from the dwelling gets no exemption at all, even if it sits inside the two hectares
- Land used for business rather than privately does not count toward the exempt area
In this guide
What the two hectare limit actually says
The exemption extends past the dwelling to adjacent land used primarily for private or domestic purposes with it: gardens, yards, sheds, tennis courts, the driveway. The cap is two hectares in total, and the land under the house itself counts toward it.
Up to that line, lifestyle blocks are treated exactly like suburban ones. Past it, every sale has a taxable component, however long the property has been the family home. That surprises a lot of owners on acreage, because the property feels like one home, but the tax law sees an exempt home and a taxable landholding sold together.
You choose which two hectares, so choose the valuable ones
Where the block exceeds two hectares, the ATO accepts that the owner selects which two hectares the exemption covers, as long as the selected area includes the dwelling. The selection does not have to be one neat rectangle, and it does not have to be the land immediately around the house.
That choice matters because land value is rarely uniform. The area with the house, the road frontage, the shedding and the subdivision potential is usually worth far more per hectare than the back paddock. Claiming the most valuable two hectares, supported by a valuation that identifies where the value sits, is entirely legitimate and routinely overlooked.
The apportionment of the sale price between exempt and taxable land follows the same logic. The ATO requires a fair and reasonable split, and where land values are not uniform, splitting on raw area is not fair and reasonable. A value-based apportionment prepared by a valuer is the supportable method.
Note
Worked exampleA home on 8 hectares sells for $1,600,000, with a total cost base of $900,000. Split by area, the exempt share would be 2 of 8 hectares, making 75 per cent of the gain taxable: a $525,000 taxable gain. A valuation instead identifies the best two hectares, covering the dwelling, gardens, shedding and road frontage, as worth $1,050,000 of the price. The taxable share falls to $550,000 of proceeds against $309,375 of apportioned cost base: a $240,625 gain. After the 50 per cent discount, the difference is roughly $142,000 of taxable income, which at the top marginal rate is in the order of $66,000 of tax. The figures are illustrative, but the direction is not.
Planning win
The selection is a planning decisionThe two hectares you claim and the basis of the split are choices made when preparing the return, not facts fixed by the title plan. Made properly, with valuation evidence behind them, they are among the few CGT decisions on a family home that can still be optimised after the sale has settled.
When the valuation is needed, and at which dates
The apportionment needs a valuation at sale, identifying the value of the selected two hectares against the whole. Where the cost base also has to be split, a retrospective valuation at the purchase date may be needed as well, because the value relativities at purchase can differ from the ones at sale.
Reports for this purpose are a defined scope within our capital gains tax valuation service: the same desktop methodology, with the apportionment set out so your accountant can drop the numbers straight into the return.
The excess land above two hectares is taxed like any other asset, which means the capital gains tax changes from 1 July 2027 apply to the gain on that part. Our CGT calculator shows how the reset splits a gain on either side of that date.
Home on more than two hectares?
Valuations that support the two hectare apportionment, prepared and signed by a Chartered Accountant and Certified Property Valuer. Residential $297, commercial $595, inc. GST, delivered in 24 to 48 hours.
Start your orderHow it worksThe subdivision trap: sell the land separately and the exemption vanishes
The exemption for adjacent land only operates when the land is sold with the dwelling, to the same buyer under the same CGT event. Subdivide and sell a paddock on its own and that sale gets no main residence exemption at all, even if the paddock sat comfortably inside your two hectares while you lived there.
Penalty risk
The order of sales changes the taxSelling the back block first and the house second can convert an exempt gain into a fully taxable one. The subdivided lot also needs its own cost base, apportioned from the original purchase on a fair and reasonable basis, which is another place a valuation carries the number. Anyone weighing up a subdivision against selling the whole should price the tax difference before engaging the surveyor.
Business use and the other exclusions
The adjacent land has to be used primarily for private or domestic purposes with the dwelling. Land used to produce income counts against that test: agistment paddocks earning fees, a commercial shed, market gardening, or land used in a farming business. Those areas fall outside the exempt selection regardless of size, and a property that mixes private and business land needs the boundary drawn and valued.
The same private-use test applies to a granny flat or second dwelling earning rent, which brings its own main residence exemption questions and, where the home first earned income part way through ownership, a cost base reset at that date. The main residence exemption guide covers how the pieces fit together.
Common questions
Is my whole five acre block covered by the main residence exemption?
Five acres is just over two hectares, so almost, but not quite. Two hectares is 4.94 acres. A five acre block leaves a small taxable sliver, and anything materially larger leaves a real one.
Can I pick which two hectares are exempt?
Yes, provided the selected area includes the land under the dwelling. It pays to select the most valuable two hectares, and a valuation is the evidence for where the value sits.
How is the sale price split between exempt and taxable land?
On a fair and reasonable basis. Where land value is uneven, that means a value-based apportionment supported by a valuation, not a simple split by area.
What happens if I subdivide and sell part of the land?
Land sold separately from the dwelling gets no main residence exemption, even land that was within your two hectares. It is taxed in full, with a cost base apportioned from the original purchase.
Does farm or business use of the land change anything?
Yes. Land used primarily to produce income rather than privately with the home cannot form part of the exempt two hectares, whatever the total size of the block.
