Home first used to produce income
If you start using part or all of your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss.
In this case, you are taken to have acquired the dwelling at its market value at the time you first used it to produce income if all of the following apply:
- you acquired the dwelling on or after 20 September 1985
- you first used the dwelling to produce income after 20 August 1996
- when a CGT event happens in relation to the dwelling, you would get only a part exemption because you used the dwelling to produce assessable income during the period you owned it, and
- you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income.
If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.
A similar rule applies if you inherit a dwelling that was the deceased's main residence and you use it to produce income.
Exception
If you made the choice to continue to treat a dwelling as your main residence after the dwelling ceases to be your main residence, and the dwelling is fully exempt, the 'home first used to produce income' rule does not apply.
In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account. The extent of the exemption depends on the period after that time and the proportion of the home used to produce income.
If the 'home first used to produce income' rule applies and the period between when you first used the dwelling to produce income and the CGT event happening is less than 12 months, the CGT discount method is not available.
Example
Home becomes a rental property after 20 August 1996
Erin purchased a home on 0.9 hectares of land in July 2000 for $280,000. The home was her main residence until she moved into a new home on 1 August 2003. On 2 August 2003, she commenced to rent out the old home. At that time, the market value of the old home was $450,000.
Erin does not want to treat the old home as her main residence under the 'continuing main residence status after dwelling ceases to be your main residence' rule as she wants the new home to be treated as her main residence from the date she moved into it.
On 14 April 2012, Erin sold the old home for $496,000. Erin is taken to have acquired the old home for $450,000 on 2 August 2003 and calculates her capital gain to be $46,000.
Because Erin is taken to have acquired the new home on 2 August 2003, and has held it for more than 12 months, she can use the discount method to calculate her capital gain. As Erin has no capital losses she includes a capital gain of $23,000 on her 2012 tax return.
Example
Part of home first used to produce income after 20 August 1996
Louise purchased a home in December 1991 for $200,000. The home was her main residence. On 1 November 2010, she started to use 50% of the home for a consultancy business. At that time the market value of the house was $320,000.
She decided to sell the property in August 2011 for $350,000. As Louise was still living in the home and using part for business, she could not get a full exemption under the continuing main residence status after dwelling ceases to be your main residence rule. The capital gain is 50% of the proceeds less the cost base.
Percentage of use
|
x
|
(Proceeds - Cost base)
|
= Capital gain
|
50%
|
x
|
($350,000 - $320,000)
|
= $15,000
|
Louise is taken to have acquired the property on 1 November 2010 at a cost of $320,000. Because she is taken to have acquired it at this time, Louise is taken to have owned it for less than 12 months and must use the 'other' method to calculate her capital gain.
If you make the choice to continue to treat a dwelling as your main residence after it ceases to be your main residence (see Treating a dwelling as your main residence after you move out), and you do not get a full exemption, the 'home first used to produce income' rule may apply.
Example
Dwelling used to produce income for more than six years and first used to produce income after 20 August 1996
Roya purchased an apartment in Australia for $280,000 under a contract that was settled on 15 September 1994, and immediately started using the apartment as her main residence.
On 29 September 1996 she moved overseas and began renting out the apartment. During the time she was overseas she did not acquire another dwelling and continued to rent out the apartment. After she returned to Australia in July 2011, she sold the apartment for $555,000. Settlement occurred in September 2011 and she incurred $15,000 agent's and solicitor's costs.
As Roya rented out the apartment, she is only entitled to choose to continue to treat the dwelling as her main residence during her absence for a maximum of six years; that is, for the period 29 September 1996 to 29 September 2002.
As Roya is only entitled to a part CGT exemption, she first used the property to produce income after 20 August 1996 and she would have been entitled to a full CGT exemption for the dwelling immediately before she started renting it out, she treats the dwelling as having been acquired on 29 September 1996 at the market value at that time, which was $340,000.
Roya works out her capital gain as follows:
Capital proceeds
|
-
|
(Cost base + costs)
|
= Total capital gain
|
$555,000
|
-
|
($340,000 + $15,000)
|
= $200,000
|
$200,000
|
x
|
3,288
5,479 days
|
= $120,021
|
Roya chooses to use the discount method and, because she has no other capital gains or capital losses, she includes a net capital gain of $60,010 ($120,021 X 50%) on her 2012 tax return.
If you inherited the home
If a person acquired their main residence on or after 20 September 1985 and they died and it passed to you as a beneficiary or as trustee of their estate after 20 August 1996, you are taken to have acquired the dwelling at its market value at the time you first used it to produce your income if:
- you first used the dwelling to produce income after 20 August 1996
- when a CGT event happens to the dwelling, you would only get a part exemption because you used the dwelling to produce assessable income during the period you owned it
- you would have been entitled to a full exemption if the CGT event happened to the dwelling immediately before you first used it to produce income, and
- the CGT event did not happen to the dwelling within two years of the person's date of death.
If all of the above apply, you must work out your capital gain or capital loss using the market value of the dwelling at the time you first used it to produce income. You do not have a choice.
Last Modified: Thursday, 28 June 2012