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If you use any part of your home to produce income before you stop 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 stop living in it.
Example 78: 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 1996, 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 2004.
On 1 July 2004, she moved out and rented out the home until it was sold under a contract that was settled on 30 June 2010. Helen chose to treat the dwelling as her main residence for the six years she rented it out. She made a capital gain of $100,000 when she sold the home.
As 25% of the home was not used as her main residence during the period before Helen stopped living in it, part of the capital gain is taxable, calculated as follows:
$100,000 25% = $25,000
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 she had 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.
Last modified: 10 Sep 2010QC 28058