If you run a business in part of your home, you are entitled to deduct part of the interest on money you borrowed to buy your home if:
part of your home is set aside exclusively as a place of business and is clearly identifiable as such, and
that part of the home is not readily adaptable for private use, for example, a doctor’s surgery located within a doctor's home.
If you rent out part of your home with access to general living areas on an arm’s length basis, you are entitled to deduct part of the interest on money borrowed to buy the home (see Taxation Ruling IT 2167).
In these situations you would satisfy the interest deductibility test. This means you would not obtain a full main residence exemption and so would have to pay tax on part of any capital gain made when you sell your home.
You may satisfy the interest deductibility test even if you didn’t borrow money to acquire your home – you must apply it on the assumption that you did borrow money to acquire it. You also satisfy the test if you were entitled to claim a deduction for the interest, even if you didn’t actually claim the deduction.
There is a special rule to work out the amount of your capital gain or loss if you first use your home to produce income in a way that satisfies the interest deductibility test after 20 August 1996.
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