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Using your home for rental or business

Find out how your capital gains tax (CGT) main residence exemption is affected if you earn income from your home.

Last updated 17 June 2024

How it works

Your main residence (your home) is exempt from CGT if you are an Australian resident.

If you rent out part of your home or run a business from home, you’re not entitled to the full main residence exemption from 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 the area of your home used to produce assessable income.

To work out your capital gain or loss, you take into account:

Market Valuation

You should get a market valuation of your home when you first start using it for rental or business, if this was after 20 August 1996.

You need to know this value to calculate your capital gain or loss 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.

Check if CGT applies – the interest deductibility test

You may not be entitled to a full main residence exemption if you use part of your home for producing assessable income. To determine if part of the capital gain is assessable, you need to determine if you would be allowed a deduction for your home loan interest if you had borrowed money to acquire your home (interest deductibility test).

The interest deductibility test must be applied regardless of whether you did or did not borrow money to acquire your home.

If you are or would be eligible to claim part of the interest expense, your home is subject to CGT to the same extent.

If you have a home loan, you can’t:

  • reduce the capital gain by not claiming some or all of the interest
  • 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 rent out part of your home (for example half of the floor area) for a period, you would be entitled to claim a deduction for half of any home loan interest for that period and 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’s your principal place of business and you have space set aside just for this purpose. Merely working from home occasionally or by choice doesn’t qualify.

You’re 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 isn’t readily adaptable for private use – for example, a doctor's surgery located in a doctor's home.

You’re not entitled to deduct interest expenses if:

  • you use a home study to do work usually done at your place of work
  • you do paid child-minding at home (unless part of your home is set aside exclusively for that purpose).

You are only eligible for the full main residence exemption if you’re not entitled to deduct interest expenses.

Work out the assessable part of your capital gain or loss

You can use the CGT property exemption tool to calculate the portion 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 portion 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 don’t 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 the date you first used your home to produce income until you sold it.

Step 6: Your net 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 2001 for $300,000. He sold it on 30 June 2024 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. This means Thomas is 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 net capital gain as follows.

  1. 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.
  2. The portion of the floor area set aside for rental is 35%.
  3. Thomas' net capital gain is $400,000 × 35% = $140,000. As he used his home for income right up to when he sold it, he doesn’t 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.

Thomas's net 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 1996 for $200,000. It was her main residence.

  • On 1 November 2016 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 2020 she shifted her consultancy practice to separate business premises and used her home solely for private purposes.
  • On 1 May 2024 she sold her house for $620,000.

Using the steps above, Fatima works out her net capital gain as follows.

  1. 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.
  2. The portion of her home's floor area set aside for business was 40%.
  3. $100,000 × 40% = $40,000. As Fatima stopped using her home for business before she sold it, she continues to step 4.
  4. Fatima used her home to produce income from 1 November 2016 to 1 August 2020, a total of 1,370 days.
  5. The period from when she first used her home to produce income until she sold it is 2,739 days (1 November 2016 to 1 May 2024).
  6. Fatima's net capital gain is $40,000 × (1,370 ÷ 2,739) = $20,007.

For CGT purposes, Fatima is treated as if she acquired the house on 1 November 2016. 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.

Fatima's net capital gain would be $10,003.

End of example

Value of home when first used to produce income

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.

This 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 can’t use the CGT discount.

Exclusions

If you:

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’ doesn’t apply as the house was rented from the time Peter acquired it. This means that Peter isn’t required to use the market value of the house at the time it was first used to produce income.

Peter works 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:

  1. Capital gain for the entire period is $780,000 − $550,000 = $230,000
  2. Peter’s home was rented out for 1,004 days (1 October 2010 to 30 June 2013)
  3. Peter’s total period of ownership was 4,564 days.
  4. 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.

Peter’s net capital gain would be $25,288.

End of example

When the rule applies

Apart from the exclusions above, the rule applies if all 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 be entitled to 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 2012 for $450,000.

  • The house was her main residence until she moved into a new house on 1 August 2023.
  • On 2 August 2023 she began renting out the old house.
  • At that time, the market value of the old house was $650,000.

Erin didn’t 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 2024 Erin sold the old house for $696,000. Erin is taken to have acquired the old house for $650,000 on 2 August 2023 and calculates her capital gain to be $46,000.

Because Erin is taken to have acquired the old house on 2 August 2023, she is taken to have owned it for less than 12 months and can’t 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=bd1bdiubfs6pgqOpens in a new window (Duration: 3:17)

Rental property becomes your main residence

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:

  1. Capital gain is $538,500 (worked out as $987,500 − $449,000)
  2. Number of days owned is 2,354
  3. Number of days the property was used to produce income is 756
  4. Assessable capital gain is $538,500 × (756 ÷ 2,354) = $172,942
  5. 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

Small business CGT concessions

If you’re 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 aren’t available if the main use of the premises is to earn rental income.

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