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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 obtain the main residence exemption for that part of the dwelling either before or after you cease living in it.
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 per cent of the home as her main residence and the remaining 25 per cent as a doctor's surgery, which she used until 30 June 1996.
On 1 July 1996, she moved out and rented out the home until it was sold under a contract that was settled on 30 June 2002. Helen chose to treat the dwelling as her main residence for the 6 years it was rented out. She made a capital gain of $10,000 when the home was sold.
As 25 per cent 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 X 25% = $2,500
Because Helen entered into the contract to acquire the house before 11.45 am 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 Helen first used the home to produce income before 21 August 1996 and because she used it to produce income from the time she purchased it.
Last modified: 06 Oct 2009QC 27417