Property Valuation When Converting Your Home to a Rental

By Mike Wilczynski, Certified Property Valuer and Chartered Accountant · Updated August 2026

When you stop living in a property and start renting it out, the ATO treats that moment as a CGT event that resets your cost base. Under Section 118-192 of the Income Tax Assessment Act 1997, the property’s market value at the date of first income-producing use becomes the first element of its cost base for calculating any future capital gain. Without a valuation at that date, your accountant has no defensible starting point when you eventually sell. You could end up paying CGT on gains that occurred while the property was your home, gains that should have been exempt.

This is the most commonly missed property valuation in Australia. Most homeowners who convert to landlords do not know a valuation is needed. They only discover the gap years later, when they sell and the accountant asks: “What was the property worth when you first rented it out?” By then, the only solution is a retrospective valuation.

Why the conversion date matters

While you live in a property as your main residence, any increase in its value is exempt from CGT under the main residence exemption. The moment you start renting it out, that exemption stops accruing (subject to the six-year absence rule, discussed below). The market value at the conversion date effectively splits the property’s capital growth into two periods: the exempt period (while it was your home) and the taxable period (while it produced income).

If you bought the property for $400,000, it was worth $700,000 when you started renting it out, and you eventually sell it for $950,000, the relevant capital gain is $250,000 ($950,000 minus $700,000), not $550,000 ($950,000 minus $400,000). The $300,000 of growth that occurred while you lived there is covered by the main residence exemption. Without the $700,000 valuation, there is no evidence to support the higher cost base.

Section 118-192: what the law says

Section 118-192 of the ITAA 1997 provides that if you first use your main residence to produce income after you acquired it, the first element of the cost base and reduced cost base is the market value of the property at the time you first used it to produce income. This overrides the original purchase price for CGT purposes.

The provision applies when all of the following are true: you acquired the property, you used it as your main residence, and you later started using it to produce income (typically by renting it out). The cost base reset is automatic under the law. The question is not whether the reset applies, but whether you have the evidence to support the market value at the conversion date.

The six-year absence rule interaction

The six-year absence rule (Section 118-145) allows you to continue treating a former home as your main residence for CGT purposes for up to six years while it is rented out. If you sell within six years, you may be fully exempt from CGT, and the conversion valuation may not be needed for the CGT calculation itself.

However, you should still get the valuation at the conversion date because:

• If you rent the property for longer than six years, the exemption expires for the excess period, and the conversion-date valuation establishes the cost base for the partial CGT calculation
• If you choose to nominate a different property as your main residence during the absence period, the former home loses the exemption from the nomination date, and the conversion valuation becomes the cost base
• The six-year clock resets if you move back in, but if you convert again, a new valuation is needed at the new conversion date
• You cannot predict at the time of conversion whether you will sell within six years, and obtaining the valuation later (retrospectively) is always less ideal than getting it at the time

What happens if you never got the valuation

This is the most common scenario we see. A homeowner moved out and started renting their property 3, 5, 10, or 15 years ago. They are now selling and their accountant has told them they need a valuation as at the date they first rented it out.

The solution is a retrospective valuation. A professional valuer uses historical comparable sales data from the period around the conversion date to determine the market value as at that date. The valuer assesses the property’s characteristics as they existed at the time (not as they exist today), using a Statement of Facts provided by the owner describing the property’s condition, features, and any improvements made since.

Retrospective valuations are routine. We prepare them for dates going back decades. The ATO accepts retrospective valuations provided they are prepared by a qualified independent valuer using documented methodology and historical evidence. The price is the same as a current-date valuation: $245 for residential.

What you need to provide for the valuation

To prepare a conversion-date valuation (current or retrospective), we need:

• The property address
• The specific date you first rented it out (or as close as you can recall, with supporting evidence such as the first lease agreement, first rental payment, or real estate agent management agreement)
• A description of the property as it existed at the conversion date. If you have since renovated, extended, or made significant improvements, we need to know what the property looked like before those changes
• Any photos from the relevant period (helpful but not essential)
• The rental amount at commencement (useful context for the valuer)

Common mistakes

Not getting a valuation at all. This is the biggest mistake. Many property owners assume they only need a valuation when they sell. By the time they sell, the conversion may have been years or decades earlier, making the retrospective assessment harder and the evidence thinner.

Using an online estimate as the cost base. CoreLogic, PropTrack, and Domain automated estimates are not accepted by the ATO as sole evidence of market value for CGT purposes. They are not prepared by a qualified independent valuer, they cannot be backdated to historical dates with accuracy, and they do not account for property-specific characteristics.

Using council rates as the cost base. Council rate assessments are bulk assessments for levying purposes. They do not reflect individual property market values and are not prepared using comparable sales methodology. The ATO does not accept council rates as sufficient valuation evidence.

Assuming the purchase price is the cost base. If you bought the property and lived in it before renting it out, the purchase price is NOT the cost base for CGT. Section 118-192 overrides the purchase price with market value at the conversion date. Using the purchase price would overstate your capital gain and result in paying more CGT than required.

Forgetting to record capital improvements. Capital improvements made after the conversion date (not repairs or maintenance, but genuine capital improvements like a new kitchen, bathroom renovation, extension, or structural work) can be added to the cost base, reducing the capital gain. Keep receipts and records of all improvements.

Worked example: the cost of not getting a valuation

Sarah bought a house in Geelong in 2012 for $380,000. She lived in it until 2017, when she moved interstate for work and started renting it out. In 2026, she sells for $780,000.

Scenario	Cost Base	Capital Gain	After 50% Discount	CGT at 32.5%
Without valuation (using purchase price)	$380,000	$400,000	$200,000	$65,000
With 2017 conversion valuation ($550,000)	$550,000	$230,000	$115,000	$37,375

The $245 valuation saves Sarah $27,625 in CGT. Even as a retrospective valuation obtained in 2026 for a 2017 date, the saving is the same. The only risk of waiting is that historical evidence becomes thinner over time.

A home converted to a rental is a capital gains tax matter rather than a fund compliance one, so the report comes from our sister brand CGT Valuations. See what a valuation for a home first used to produce income covers and what the ATO expects as evidence.