• Dwelling used to produce income

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    You may have to pay tax on part of any capital gain you make on the disposal of a dwelling if:

    • you acquired it on or after 20 September 1985 and used it as your main residence
    • during all or part of the period you owned it you also used part of it to produce income and
    • you would be allowed a deduction for interest if you incurred it on money borrowed to acquire the dwelling.

    If you run a business or professional practice in part of your home, you are entitled to an interest deduction if you have part of the home set aside exclusively as a place of business, that part of the home is clearly identifiable as a place of business and it is not readily adaptable for private use - for example, a doctor's surgery located within the doctor's home. If you rent out part of your home, you would also be entitled to a partial interest deduction if you had borrowed money to acquire your home.

    The use of a home study to undertake work ordinarily done at your place of work but done at home for convenience would not affect the main residence exemption. Paid child-minding would also not affect the main residence exemption unless a special part of the home was set aside exclusively for that purpose.

    You will not have to pay capital gains tax if someone else uses part of your property for income producing purposes and you receive no income from that person.

    When a CGT event happens in relation to the home, the proportion of the capital gain on which you may have to pay tax is an amount that is reasonable having regard to the extent to which you would have been able to deduct the interest on money borrowed to acquire your home.

    In most cases the appropriate method of determining the extent that the interest would have been deductible is the proportion of the floor area of the home that is set aside for an income producing purpose and the period that the home is income producing.

    Example

    Renting out part of a home

    Thomas purchased a home on 1 July 1995 and sold it on 30 June 2000. The home was his main residence for the entire 5 years.

    Throughout the period he owned it a tenant rented one bedroom, which represented 20 per cent of the home. Both Thomas and the tenant used the living room and kitchen, which represented 30 per cent of the home. Only Thomas used the remainder of the home. Therefore Thomas would be entitled to a 35 per cent deduction for interest if he had incurred it on money borrowed to acquire his home.

    Thomas made a capital gain of $20,000 when he sold the home. Of this total gain, he has to pay tax on the following proportion:

    Capital gain

    x

    % of floor area

    =

    Taxable portion

    $20 000

     

    35%

    =

    $7000

    Example

    Running a business in part of a home for part of the period of ownership

    Rachel bought her home on 1 January 1998 and sold it on 31 December 1999. It was her main residence for the entire 2 years.

    On 1 January 1999, halfway through her period of ownership, she began using part of the home to operate her photographic business. The rooms were modified for that purpose and were no longer suitable for private and domestic use. They represented 25 per cent of the total floor area of the home.

    When she sold the home, Rachel made a capital gain of $8,000. She had to pay tax on the following proportion of the gain:

    Capital gain

    X

    % of floor area

    X

    % of period of ownership

    =

    taxable portion

    $8,000

    X

    25%

    X

    50%

    =

    $1,000

    Last modified: 18 Sep 2009QC 18323