If you use any part of your home to produce income before you cease living in it, you cannot apply the 'continuing main residence status after dwelling ceases to be your main residence' rule to that part. This means you cannot get the main residence exemption for that part of the dwelling either before or after you cease living in it.
Example – Ceasing to live in a home after part of it is used to produce income
Helen purchased a home under a contract that was settled on 1 July 1992 and she moved in immediately. She used 75% of the home as her main residence and the remaining 25% as a doctor's surgery, which she used until 30 June 1997.
On 1 July 1998, she moved out and rented out the home until it was sold under a contract that was settled on 30 June 2004. Helen chose to treat the dwelling as her main residence for the six years it was rented out. She made a capital gain of $10,000 when the home was sold.
As 25% of the home was not used as her main residence during the period before Helen ceased living in it, part of the capital gain is taxable, calculated as follows:
$10,000 × 25% = $2,500
Because Helen entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 and sold it after that time, and owned it for at least 12 months, she can use either the indexation or the discount method to calculate her capital gain.
The 'home first used to produce income rule' does not apply because she used it to produce income from the time she purchased it.End of example