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  • Using your home for rental or business

    If you rent out part of your home or run a business from home, you do not get the full main residence exemption from capital gains tax (CGT).

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    How it works

    When you sell your home, the part you used for rental or to run a business is subject to CGT.

    You can usually claim income tax deductions for that part of your home because it has been used to produce assessable income.

    To work out your assessable capital gain or loss, you take into account:

    • the proportion of the floor area that was set aside for rental or to run a business
    • the period you used it for this purpose
    • the capital gain or loss on your home since you first started using it for rental or business, assuming this was after 20 August 1996. If it was before this, you use the gain or loss since you acquired your home.

    It is a good idea to get your home valued when you first start using it for rental or business. You'll need to know this value later when you sell it.

    If you move out of your home and rent it out, you can continue treating your former home as your main residence for up to 6 years.

    Check whether CGT applies – the interest deductibility test

    If you use part of your home for rent or business you would be allowed a tax deduction for part of any home loan interest.

    Your home is subject to CGT to the same extent. This is called the interest deductibility test.

    It does not matter whether you actually had a home loan or whether you actually claimed the deduction. You apply the test as if you did.

    Renting out part of your home

    If you rented out half your home for a period you would be entitled to claim a deduction for half of any home loan interest for that period. Therefore half of the capital gain or loss for the period would be assessable.

    Running a business from home

    You are running a business from home if it is your principal place of business and you have a space set aside just for this purpose. Merely working from home occasionally does not qualify.

    You would be entitled to deduct part of any home loan interest if:

    • part of your home is set aside exclusively as a place of business and is clearly identifiable as such
    • that part of the home is not readily adaptable for private use – for example, a doctor's surgery located in a doctor's home.

    You would not be entitled to deduct interest expenses if, for example:

    • you use a home study to do work usually done at your place of work
    • you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose).

    If you are not entitled to deduct interest expenses you are eligible for the full main residence exemption.

    Claiming deductions and the CGT exemption

    If you would be allowed a deduction for home loan interest for part of your home:

    • you cannot get a CGT exemption for that part of the property by not claiming the deduction
    • you cannot include the interest in the cost base of the property if you are entitled to a deduction but do not claim it.

    You can still get a full main residence exemption if someone else uses part of your home to produce income and you receive no income from that person.

    Work out the assessable part of your capital gain or loss

    You can use the CGT property exemption tool to calculate the proportion of your home that is subject to CGT.

    Alternatively, you can work out the assessable part of your capital gain or loss as follows:

    Step 1: Work out the capital gain or loss on your home based on its value when you first used it to produce income.

    Step 2: Determine the proportion of your home's floor area that you set aside to produce income.

    Step 3: Multiply steps 1 × 2. If you:

    • used your home to produce income right up to when you sold it, this is your assessable capital gain or loss – you do not need to continue
    • stopped using your home to produce income before you sold it – continue to step 4.

    Step 4: Determine the number of days you used your home to produce income.

    Step 5: Determine the number of days from when you first used your home to produce income until you sold it.

    Step 6: Your assessable capital gain is steps 3 × 4 ÷ 5.

    Example: part of home used for income throughout ownership period

    Thomas bought a house on 1 July 2000 for $300,000. He sold it on 30 June 2019 for $700,000. The house was his main residence for the entire time.

    Throughout the period Thomas owned the house a tenant rented one bedroom, which represented 20% of the house. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the house. Only Thomas used the remainder of the house. Therefore, Thomas would be entitled to a 35% deduction for home loan interest (if he incurred it).

    Using the steps above, Thomas works out his assessable capital gain as follows.

    1. Thomas used his home for income from the time he acquired it. Therefore he uses its initial value to work out his capital gain:
      $700,000 − $300,000 = $400,000.
    2. The proportion of the floor area set aside for rental is 35%.
    3. Thomas' assessable capital gain is $400,000 × 35% = $140,000. As he used his home for income right up to when he sold it, he does not need to apportion the time it was used to produce income.

    As Thomas owned his house for at least 12 months he can use the CGT discount (50% for individuals) to reduce his capital gain. Therefore, Thomas's assessable capital gain would be $70,000.

    End of example

     

    Example: part of home used for income for part of ownership period

    Fatima bought a house in December 1995 for $200,000. It was her main residence.

    • On 1 November 2015 she started to use 40% of the house for a consultancy business. At that time the market value of the house was $520,000.
    • On 1 August 2019 she shifted her consultancy practice to separate business premises and once again used her home solely for private purposes.
    • On 1 May 2020 she sold her house for $620,000.

    Using the steps above, Fatima works out her assessable capital gain as follows.

    1. Her capital gain based on the value of her home when she first used it to produce income is $620,000 − $520,000 = $100,000.
    2. The proportion of her home's floor area set aside for business was 40%.
    3. $100,000 × 40% = $40,000. As Fatima stopped using her home for business before she sold it, she continues to step 4.
    4. Fatima used her home to produce income from 1 November 2015 to 1 August 2019, a total of 1,370 days.
    5. The period from when she first used her home to produce income until she sold it is 1,644 days.
    6. Fatima's assessable capital gain is $40,000 × 1,370 ÷ 1,644 = $33,333.

    For CGT purposes, Fatima is taken to have acquired the house on 1 November 2015. This is more than 12 months before she sold it, so she can use the CGT discount (50% for individuals) to reduce her capital gain. Therefore, Fatima's assessable capital gain would be $16,667.

    End of example

    Value of home when first used to produce income

    If you use your home to produce income you are generally taken to have acquired it at the time you first used it for this purpose.

    This means when you sell your home, you work out the capital gain or loss using its market value at the time you first used it to produce income.

    It is called the 'home first used to produce income rule'.

    If you sell your home within 12 months of when you first use it to produce income you cannot use the CGT discount.

    Exclusions

    If you:

    When the rule applies

    Apart from the exclusions above, the rule applies if all of the following are true:

    • you acquired the property on or after 20 September 1985
    • you first used the property to produce income after 20 August 1996
    • when you sell the property (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce income during the period you owned it
    • you would have been entitled to a full exemption if the sale or other CGT event happened to the property immediately before you first used it to produce income.

    Example: home becomes a rental property

    Erin bought a house in July 2010 for $450,000.

    • The house was her main residence until she moved into a new house on 1 August 2018.
    • On 2 August 2018 she began renting out the old house.
    • At that time, the market value of the old house was $650,000.

    Erin did not want to treat the old house as her main residence under the ‘continuing main residence status after moving out’ option as she wanted the new house to be treated as her main residence from the date she moved into it.

    In June 2019 Erin sold the old house for $696,000. Erin is taken to have acquired the old house for $650,000 on 2 August 2018 and calculates her capital gain to be $46,000.

    Because Erin is taken to have acquired the old house on 2 August 2018, she is taken to have owned it for less than 12 months and therefore cannot use the CGT discount to reduce her capital gain.

    End of example

    Watch: Selling a rental property that was your home

    Media: Selling a rental property that was your home
    http://tv.ato.gov.au/ato-tv/media?v=bd1bdiubfs6pgqExternal Link (Duration: 3:17)

    Small business CGT concessions

    If you are not entitled to a full main residence exemption because you use your home for business purposes, you may be able to apply the small business CGT concessions to reduce your capital gain.

    The concessions are not available if the main use of the premises is to earn rental income.

    Last modified: 04 Aug 2021QC 66033