Find out how your main residence exemption will be affected if you earn income from your home.
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:
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.
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.
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:
You would not be entitled to deduct interest expenses if, for example:
If you are not entitled to deduct interest expenses you are eligible for the full main residence exemption.
Work out the assessable part of your capital gain or loss
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.
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:
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).
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.
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.
Fatima bought a house in December 1995 for $200,000. It was her main residence.
Using the steps above, Fatima works out her assessable capital gain as follows.
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.
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.
If you:
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:
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.
Apart from the exclusions above, the rule applies if all of the following are true:
Erin bought a house in July 2011 for $450,000.
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.
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:
The total number of days you owned the property is calculated using the contract purchase and sale dates, not settlement dates.
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:
Farnaz includes a net capital gain of $86,471 in her 2023 tax return.
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.
