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A special rule affects the way you calculate a capital gain if you use your main residence for income producing purposes.
You are taken to have acquired the dwelling at its market value at the time it first becomes income producing if all of the following apply.
- You acquired the dwelling on or after 20 September 1985 or you inherited a dwelling which the deceased person acquired on or after that date.
- You first used the dwelling for an income producing purpose after 20 August 1996.
- When a CGT event happens in relation to the dwelling you would get only a partial exemption because the dwelling was used 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.
- If the dwelling passed to you as a beneficiary or a trustee of a deceased estate, the CGT event did not happen in relation to the dwelling within 2 years of the date of death of the person.
In working out the amount of capital gain when the CGT event happens, the period before the dwelling becomes income producing is not taken into account. The extent of the exemption depends on the period and the proportion of the home used to produce income - see the following examples.
If this special rule applies to a home which you have inherited from a deceased estate, you are considered to have acquired the home when it was first used to produce income.
Home first used to produce income after 20 August 1996
Anne purchased a home in December 1991 for $200,000. The home was her main residence. On 31 December 1998 she started to use 50 per cent of the home for a consultancy business. At that time the market value of the house was $220,000. She decided to sell the property in December 1999 for $250,000. The capital gain is 50 per cent of the proceeds less the cost base.
Percentage of use x (proceeds cost base) = capital gain
50% x ($250,000 - $$220,000) = $15,000
Anne is taken to have acquired the property in December 1998 at a cost of $220,000. As she owned it for less than 12 months when she disposed of it, there is no indexation of the market value nor is the CGT discount available.
Last modified: 18 Sep 2009QC 18323