Prime Minister Julia Gillard will have to move out of The Lodge while millions of dollars in repairs are done.
The 84-year-old official residence in Canberra has a leaky roof, rusty plumbing, wiring that is a fire hazard, and asbestos that needs to be removed.
The repair project - which is yet to be costed - will take about 18 months to complete, Special Minister of State Gary Gray said.
"If The Lodge were a patient it would be in hospital," Mr Gray told ABC Television on Tuesday.
"There is a lot of work to be done."
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
The makeover includes replacing the slate roof and "massive work" on the wiring, "much of which is old copper wrapped in cloth, and so therefore a substantial fire risk".
"We don't expect it to be cheap. It will certainly cost in the millions of dollars," Mr Gray said.
"It can't just be fixed up with a trip down to Bunnings."
Mr Gray said an "appropriate residence" would be found for the prime minister and her partner Tim Mathieson.
A block of land has been set aside at Yarralumla for a new official residence, but no government has gone ahead with the project.
"I think in the future that will happen, but that will be a long way down the track," Mr Gray said.
"Regardless of whether or not the prime minister is in residence at The Lodge, it is a heritage building ... and therefore it should be appropriately and properly protected."
Asked by reporters if he supported the building of a new official home for the PM, Opposition Leader Tony Abbott replied: "No."
