A flat or home unit often includes areas (for example, a laundry, storeroom or garage) that are physically separate from the flat or home unit. As long as these areas are used primarily for private or domestic purposes in association with the flat or home unit for the whole period you own it, they are exempt on the same basis that the flat or home unit is exempt.
However, if you dispose of one of these structures separately from the flat or home unit, they are not exempt.
Main residence for only part of the period you owned it
If a CGT event happens in relation to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you get only a part exemption.
The part of the capital gain that is taxable is calculated as follows:
Total capital gain made from the CGT event × (number of days in your ownership when the dwelling was not your main residence ÷ total number of days in your ownership period)
Example – Main residence for part of the ownership period
Andrew bought a house under a contract that was settled on 1 July 1990 and moved in immediately. On 1 July 1993, he moved out and began to rent out the house. He did not choose to treat the house as his main residence for the period after he moved out, although he could have done this under the 'continuing main residence status after dwelling ceases to be your main residence' rule. The 'home first used to produce income' rule does not apply because Andrew used the home to produce income before 21 August 1996.
The contract for the sale of the house was settled on 1 July 2003 and Andrew made a capital gain of $10,000. As he is entitled to a part exemption, Andrew's capital gain is as follows:
$10,000 × (3,653 days ÷ 4,749 days) = $7,692
As Andrew entered into the contract to acquire the house before 11.45am (by legal time in the ACT) on 21 September 1999 but the CGT event occurred after this date, Andrew can choose to use the discount method or the indexation method to calculate his capital gain.End of example
If a dwelling was not your main residence for the whole time you owned it, some special rules may entitle you to a full exemption or extend the part exemption you would otherwise get. These rules apply to land or a dwelling if:
- you choose to treat the dwelling as your main residence, even though you no longer live in it (see Continuing main residence status after dwelling ceases to be your main residence)
- you moved into the dwelling as soon as practicable after its purchase (see Moving into a dwelling)
- you are changing main residences (see Moving from one main residence to another)
- you are yet to live in the dwelling but will do so as soon as practicable after it is constructed, repaired or renovated and you will continue to live in it for at least three months (see Constructing, renovating or repairing a dwelling on land you already own), or
- you sell vacant land after your main residence is accidentally destroyed (see Destruction of dwelling and sale of land).
Dwelling used to produce income
Usually you cannot get the full main residence exemption if you:
- acquired your dwelling on or after 20 September 1985 and used it as your main residence
- used any part of it to produce income during all or part of the period you owned it, and
- would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling (interest deductibility test).
The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling.
If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.
If you run a business or professional practice in part of your home, you would be entitled to deduct part of the interest on money you borrowed to acquire the dwelling if:
- part of the dwelling is set aside exclusively as a place of business and is clearly identifiable as such, and
- that part of the home is not readily adaptable for private use – for example, a doctor's surgery located within the doctor's home.
You would not be entitled to deduct any interest expenses if, for convenience, you use a home study to undertake work usually done at your place of work. Similarly, you would not be entitled to deduct interest expenses if you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose). In these situations, you would still get a full main residence exemption.
Example – Renting out part of a home
Thomas purchased a home under a contract that was settled on 1 July 1997 and sold it under a contract that was settled on 30 June 2004. The home was his main residence for the entire seven years.
Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room and kitchen which represented 30% of the home. Only Thomas used the remainder of the home. Therefore Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home. The 'home first used to produce income' rule (explained below) does not apply because Thomas used the home to produce income from the date he purchased it.
Thomas made a capital gain of $20,000 when he sold the home. Of this total gain, the following proportion is not exempt:
Capital gain × percentage of floor area = taxable portion
$20,000 × 35% = $7,000
As Thomas entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, he can use either the indexation or the discount method to calculate his capital gain.End of example
If you set aside and use part of the dwelling exclusively as a place of business, you cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base 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.
When a CGT event happens in relation to the home, the proportion of the capital gain or capital loss that is taxable 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 the home.
In most cases this is the proportion of the floor area of the home that is set aside to produce income and the period the home is used to produce income. This includes if the dwelling is available (for example, advertised) for rent.
Example – Running a business in part of a home for part of the period of ownership
Ruth bought her home under a contract that was settled on 1 January 1999. She sold it under a contract that was entered into on 1 November 2003 and was settled on 31 December 2003. It was her main residence for the entire five years.
From the time she bought it until 31 December 2001, Ruth used 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% of the total floor area of the home.
When she sold the home, Ruth made a capital gain of $8,000. The following proportion of the gain is taxable:
Capital gain × percentage of floor area not used as main residence × percentage of ownership that that part of the home was not used as main residence = taxable portion
$8,000 × 25% × 60% = $1,200
As Ruth entered into the contract to acquire the home before 11.45am (by legal time in the ACT) on 21 September 1999 and entered into the contract to sell it after that time, and held it for at least 12 months, she can use either the indexation or discount method to calculate her capital gain.
The 'home first used to produce income' rule (explained below) does not apply because Ruth used the home to produce income from the date she purchased it.End of example
For more information on rental properties (for example, negative gearing and deductions, get the publication Rental properties).