• Other structures associated with the dwelling

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    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 as 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.

    Part exemption

    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 obtain 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

    X

    Number of days in your ownership period when
      the dwelling was not your main residence  

    Total number of days in your ownership period

    Example
    Main residence for the first 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 rule Continuing main residence status after dwelling ceases to be your main residence. The Home first used to produce income rule does not apply.

    This is 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 1999 and Andrew made a capital gain of $10 000. The capital gain is:

    $10 000 X

    2191
    3287

    = $6666

    As Andrew entered into the contract for sale of the house before 11.45am on 21 September 1999, he cannot use the discount method to calculate his capital gain, but he can use the indexation method.

    Example
    Main residence for the second part of the ownership period

    Th r se bought a house under a contract that was settled on 11 March 1993 and rented it out immediately. On 29 June 1996 she stopped renting it out and moved in. Th r se sold the house under a contract that was settled on 15 March 2001 and made a capital gain of $20 000. The capital gain is:

    $20 000 X

    1206
    2926

    = $8243

    As Th r se entered into the contract to acquire the house before 11.45am on 21 September 1999 and entered into the contract to sell it after that time-and she held it for at least 12 months-she can use either the indexation or the discount method to calculate her capital gain.

    Note
    Period of absence

    Th r se cannot choose to treat the house as her main residence during the period she was absent under the rule Continuing main residence status after dwelling ceases to be your main residence because the house was not her main residence before she rented it out. Also, the Home first used to produce income rule does not apply because Th r se used the home to produce income from the date she purchased it.

    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 obtain. These rules apply to land or a dwelling if:

    Dwelling used to produce income

    Usually you cannot obtain the full main residence exemption if you use any part of the dwelling to produce income. However, there is a special rule if:

    • you first used the dwelling to produce income after 20 August 1996, and
    • you would obtain only a part exemption because the dwelling was used to produce income, and
    • you would have obtained a full exemption if you had disposed of the dwelling just before you first used it to produce income.

    For more information, see Home first used to produce income.

    Assuming this rule does not apply to you, part of any capital gain you make may be taxable if you:

    • acquired it on or after 20 September 1985 and used it as your main residence, and
    • 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.

    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.

    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.

    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 obtain a full main residence exemption.

    You can still obtain 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 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.

    Example
    Renting out part of a home

    Thomas purchased a home under a contract that was settled on 1 July 1996 and sold it under a contract that was settled on 30 June 2001. The home was his main residence for the entire five 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 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 X % of floor area

    = Taxable portion

    $20 000 X 35%

    = $7000

    As Thomas entered into the contract to acquire the home before 11.45am 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.

    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 2000 and was settled on 31 December 2000. It was her main residence for the entire two years.

    From the time she bought it until 31 December 1999 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 $8000. The following proportion of the gain is taxable:

    Capital gain

    X

    % of floor area

    X

    % period of ownership

    =

    taxable portion

    $8000

    X

    25%

    X

    50%

    =

    $1000

    As Ruth entered into the contract to acquire the home before 11.45am 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 the discount method to calculate her capital gain.

    TheHome 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.

    For more information on rental properties (for example, negative gearing and deductions) obtain a copy of the publication Rental properties.

    Home first used to produce income

    If you start using your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss.

    In this case, you are taken to have acquired the dwelling at its market value at the time it is first used to produce income if all of the following apply:

    • you acquired the dwelling on or after 20 September 1985, and
    • you first used the dwelling to produce income after 20 August 1996, and
    • when a CGT event happens in relation to the dwelling, you would obtain only a part exemption because the dwelling was used to produce assessable income during the period you owned it, and
    • 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 a deceased's main residence passed to you as a beneficiary or as trustee of their estate on or after 20 September 1985, you are taken to have acquired the dwelling at its market value at the time it was first used to produce your income only if:

    • the last three dot points above all apply, and
    • the CGT event did not happen in relation to the dwelling within two years of the person's date of death.

    Note
    Full exemption

    You may have made the choice to treat a dwelling as your main residence under Continuing main residence status after dwelling ceases to be your main residence. In this case, the dwelling is fully exempt and the Home first used to produce income rule does not apply.

    In working out the amount of capital gain or capital loss, the period before the dwelling is first used by you to produce income is not taken into account. The extent of the exemption depends on the period after that time and the proportion of the home used to produce income. The following example explains this.

    Example
    Home first used to produce income after 20 August 1996

    Louise purchased a home in December 1991 for $200 000. The home was her main residence. On 1 November 1999 she started to use 50% 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 August 2000 for $250 000. As Louise had not ceased living in the home, she could not obtain a full exemption under the Continuing main residence status after dwelling ceases to be your main residence rule. The capital gain is 50% of the proceeds less the cost base.

    Percentage of use

    X

    (proceeds - cost base)

    =

    Capital gain

    50%

    X

    ($250 000-$220 000)

    =

    $15 000

    Louise is taken to have acquired the property on 1 November 1999 at a cost of $220 000. Because she is taken to have acquired it at this time, Louise is taken to have owned it for less than 12 months and must use the 'other' method to calculate her capital gain.

    Last modified: 31 Aug 2010QC 16195