Your main residence (your home) is generally exempt from capital gains tax (CGT). However, you cannot usually obtain the full main residence exemption if you:
- acquired your dwelling on or after 20 September 1985 and used it as your main residence, and
- used any part of it to produce income during all or part of the period you owned it, and
- would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling (interest deductibility test).
The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling.
If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.
If you run a business or professional practice in part of your home, you would be entitled to deduct part of the interest on money you borrowed to acquire the dwelling if:
- part of the dwelling 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 the doctor's home.
You would not be entitled to deduct any interest expenses if, for convenience, you use a home study to undertake work usually done at your place of work. Similarly, you would not be entitled to deduct interest expenses if you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose). In these situations, you could still get a full main residence exemption.
Example
Renting out part of a home
Thomas purchased a home under a contract that was settled on 1 July 1999 and sold it under a contract that was settled on 30 June 2012. The home was his main residence for the entire thirteen years.
Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen which represented 30% of the home. Only Thomas used the remainder of the home. Therefore, Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home.
Note: The home first used to produce income rule does not apply because Thomas used the home to produce income from the date he purchased it.
Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:
Capital gain
|
x
|
Percentage of floor area
|
=
|
Taxable portion
|
$120,000
|
x
|
35%
|
=
|
$42,000
|
As Thomas entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.
Last Modified: Thursday, 28 June 2012