If you rent out part of your home or run a business from home, you do not get the full main residence exemption from capital gains tax (CGT).
When you sell your home, the part you used for rental or to run a business is subject to CGT.
You can usually claim income tax deductions for that part of your home because it has been used to produce assessable income.
To work out your assessable capital gain or loss, you take into account:
- the proportion of the floor area that was set aside for rental or to run a business
- the period you used it for this purpose
- the capital gain or loss on your home since you first started using it for rental or business, assuming this was after 20 August 1996. If it was before this, you use the gain or loss since you acquired your home.
It is a good idea to get your home valued when you first start using it for rental or business. You'll need to know this value later when you sell it.
If you move out of your home and rent it out, you can continue treating your former home as your main residence for up to 6 years. However, you can’t claim a main residence exemption for any other property for the same period
You may not be entitled to a full main residence exemption if you use part of your home for producing assessable income. If you pass the interest deductibility test you will have some assessable capital gain.
The test is, if you had borrowed to acquire the home would you be allowed a tax deduction for part of the home loan interest.
If you would be eligible to claim part of the interest expense your home is subject to CGT to the same extent.
If you actually have a home loan you cannot reduce the capital gain by not claiming some or all of the interest, nor can you increase the cost base of your home by the amount of interest you choose not to claim.
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 for the use of the property.
Renting out part of your home
If you rented out half your home for a period you would be entitled to claim a deduction for half of any home loan interest for that period. Therefore, half of the capital gain or loss for the period would be assessable.
Running a business from home
You are running a business from home if it is your principal place of business and you have a space set aside just for this purpose. Merely working from home occasionally does not qualify.
You would be entitled to deduct part of any home loan interest if:
- part of your home is set aside exclusively as a place of business and is clearly identifiable as such
- that part of the home is not readily adaptable for private use – for example, a doctor's surgery located in a doctor's home.
You would not be entitled to deduct interest expenses if, for example:
- you use a home study to do work usually done at your place of work
- you do paid child-minding at home (unless a special part of the home was set aside exclusively for that purpose).
If you are not entitled to deduct interest expenses you are eligible for the full main residence exemption.
You can use the CGT property exemption tool to calculate the proportion of your home that is subject to CGT.
Alternatively, you can work out the assessable part of your capital gain or loss as follows:
Step 1: Work out the capital gain or loss on your home based on its value when you first used it to produce income.
- There are exceptions if you first used your home to produce income before 21 August 1996 or inherited your home. See Value of home when first used to produce income
Step 2: Determine the proportion of your home's floor area that you set aside to produce income.
Step 3: Multiply steps 1 × 2. If you:
- used your home to produce income right up to when you sold it, this is your assessable capital gain or loss – you do not need to continue
- stopped using your home to produce income before you sold it – continue to step 4.
Step 4: Determine the number of days you used your home to produce income.
Step 5: Determine the number of days from when you first used your home to produce income until you sold it.
Step 6: Your assessable capital gain is step 3 × (step 4 ÷ step 5).
Example: part of home used for income throughout ownership period
Thomas bought a house on 1 July 2000 for $300,000. He sold it on 30 June 2023 for $700,000. The house was his main residence for the entire time.
Throughout the period Thomas owned the house a tenant rented one bedroom, which represented 20% of the house. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the house. Only Thomas used the remainder of the house. Therefore, Thomas would be entitled to a 35% deduction (20% + (30% ÷ 2 people) for home loan interest (if he incurred it).
Using the steps above, Thomas works out his assessable capital gain as follows.
- Thomas used his home to produce income from the time he acquired it. Therefore he uses its initial value to work out his capital gain:
$700,000 − $300,000 = $400,000.
- The proportion of the floor area set aside for rental is 35%.
- Thomas' assessable capital gain is $400,000 × 35% = $140,000. As he used his home for income right up to when he sold it, he does not need to apportion the time it was used to produce income.
As Thomas owned his house for at least 12 months he can use the CGT discount (50% for individuals) to reduce his capital gain. Therefore, Thomas's assessable capital gain would be $70,000.End of example
Example: part of home used for income for part of ownership period
Fatima bought a house in December 1995 for $200,000. It was her main residence.
- On 1 November 2015 she started to use 40% of the house for a consultancy business. At that time the market value of the house was $520,000.
- On 1 August 2019 she shifted her consultancy practice to separate business premises and once again used her home solely for private purposes.
- On 1 May 2023 she sold her house for $620,000.
Using the steps above, Fatima works out her assessable capital gain as follows.
- Her capital gain based on the value of her home when she first used it to produce income is $620,000 − $520,000 = $100,000.
- The proportion of her home's floor area set aside for business was 40%.
- $100,000 × 40% = $40,000. As Fatima stopped using her home for business before she sold it, she continues to step 4.
- Fatima used her home to produce income from 1 November 2015 to 1 August 2019, a total of 1,370 days.
- The period from when she first used her home to produce income until she sold it is 2,739 days.
- Fatima's assessable capital gain is $40,000 × 1,370 ÷ 2,739 = $20,007.
For CGT purposes, Fatima is taken to have acquired the house on 1 November 2015. This is more than 12 months before she sold it, so she can use the CGT discount (50% for individuals) to reduce her capital gain. Therefore, Fatima's assessable capital gain would be $10,003.End of example
If you use your home to produce income you are generally taken to have acquired it at the time you first used it for this purpose.
This means when you sell your home, you work out the capital gain or loss using its market value at the time you first used it to produce income.
It is called the 'home first used to produce income rule'.
If you sell your home within 12 months of when you first use it to produce income you cannot use the CGT discount.
- use your home to produce income from the time you acquire it, the rule does not affect you – for example, see Rental property becomes your main residence
- inherit a dwelling that was the deceased’s main residence – the rule does not apply if you sell the dwelling within 2 years
- choose to continue treating a property as your main residence after you move out – if the property is fully exempt, the rule does not apply.
Example – 'Home first used to produce income rule' does not apply
Peter bought a house on 1 October 2010 for $550,000. He rented it out until 30 June 2013.
Peter moved into the house on 1 July 2013 and lived in it for the entire period until it was sold on 30 March 2023 for $780,000.
The ‘home first used to produce income rule’ does not apply as the house was rented from the time Peter acquired it. This means that Peter is not required to use the market value of the house at the time it was first used to produce income.
Peter will work out the capital gain based on the cost base of $550,000. Peter is entitled to the main residence exemption from 1 July 2013 to 30 March 2023 (3,560 days).
The assessable part of Peter’s capital gain will be calculated as follows:
- Capital gain for the entire period is $780,000 − $550,000 = $230,000
- Peter’s home was rented out for 1,004 days (1 October 2010 to 30 June 2013)
- Peter’s total period of ownership was 4,564 days.
- Capital gain for the period that was rented out is $230,000 × (1,004 ÷ 4,564) = $50,577.
Peter is entitled to the CGT discount of 50% which will reduce his capital gain. This means Peter’s assessable capital gain would be $25,288.End of example
When the rule applies
Apart from the exclusions above, the rule applies if all of the following are true:
- you acquired the property on or after 20 September 1985
- you first used the property to produce income after 20 August 1996
- when you sell the property (or another CGT event happens to it), you would get only a partial CGT exemption because you used it to produce income during the period you owned it
- you would have been entitled to a full exemption if the sale or other CGT event happened to the property immediately before you first used it to produce income.
Example: home becomes a rental property
Erin bought a house in July 2011 for $450,000.
- The house was her main residence until she moved into a new house on 1 August 2022.
- On 2 August 2022 she began renting out the old house.
- At that time, the market value of the old house was $650,000.
Erin did not want to treat the old house as her main residence under the ‘continuing main residence status after moving out’ option as she wanted the new house to be treated as her main residence from the date she moved into it.
In June 2023 Erin sold the old house for $696,000. Erin is taken to have acquired the old house for $650,000 on 2 August 2022 and calculates her capital gain to be $46,000.
Because Erin is taken to have acquired the old house on 2 August 2022, she is taken to have owned it for less than 12 months and therefore cannot use the CGT discount to reduce her capital gain.End of example
Watch: Selling a rental property that was your home
Media: Selling a rental property that was your home
https://tv.ato.gov.au/ato-tv/media?v=bd1bdiubfs6pgqExternal Link (Duration: 3:17)
If your rental property becomes your main residence, your eligibility for a main residence exemption is limited to the period you lived in the property. For the period the property was rented out, you will be liable for CGT when you sell the property.
Use the following formula to work out your CGT when you sell your property:
- Capital gain or loss × (number of days the property was used to produce income ÷ total number of days you owned the property)
The total number of days you owned the property is calculated using the contract purchase and sale dates, not settlement dates.
You can also use the Capital gains tax property exemption tool to work out what percentage of your capital gain is exempt from capital gains tax (CGT).
Example: Rental property becomes your home
Farnaz entered into a contract to purchase a property on 21 October 2016 for $449,000. She immediately rented out the property.
The property was rented for 2 years, until Farnaz moved into the property on 16 November 2018. Farnaz lived in the property as her main residence until she signed a contract to sell her home on 1 April 2023 for $987,500.
Farnaz works out her net capital gain as follows:
- Capital gain is $538,500 (worked out as $987,500 − $449,000)
- Number of days owned is 2,354
- Number of days the property was used to produce income is 756
- Assessable capital gain is $538,500 × (756 ÷ 2,354) = $172,942.
- Net capital gain after applying the 50% CGT discount for owning the property for over 12 months is $86,471 (worked out as $172,942 × 50%)
Farnaz includes a net capital gain of $86,471 in her 2023 tax return.End of example
If you are not entitled to a full main residence exemption because you use your home for business purposes, you may be able to apply the small business CGT concessions to reduce your capital gain.
The concessions are not available if the main use of the premises is to earn rental income.Find out how your main residence exemption will be affected if you earn income from your home.