Home business may impact on your main residence exemption

Generally, the sale of your principal home is exempt from CGT under the main residence exemption.

The full main residence exemption may, however, not be available where:

• The dwelling was acquired on or after September 20, 1985 and used as the main residence; and
   
• Any part of the dwelling was used to produce business income during all or part of the period it was owned; and
    
• The taxpayer would be allowed a deduction for any interest the taxpayer incurred on money borrowed to acquire the dwelling (the interest deductibility test)

The interest deductibility test applies regardless of whether money was actually borrowed to acquire the dwelling. Where a business or professional practice is run from the dwelling or part of the dwelling, the taxpayer would be entitled to deduct part of any interest on money borrowed.

For example, where a taxpayer would have been entitled to a 35% deduction for interest on money had it been borrowed, that 35% of the dwelling is not exempt from CGT.

The proportion that is exempt generally depends on the area and the period it was used for income producing purposes. Consider the following Tax Office example:

• Ruth bought a house on January 1, 1999 and sold it under a contract that settled on December 31, 2012, during which time it was her main residence; and
• From the purchase date until June 30, 2005 25% of the total floor area of the home was used exclusively for income producing purposes 

In the above situation, Ruth made a capital gain of $80,000 of which $10,000 is the taxable portion [$80,000 x 25% x 50% time of ownership it was not 100% used as main residence].

Where an income producing activity commences not from the purchase date, but instead a later date, the "home first used to produce income" rule applies.

This rule only applies to income producing activities after August 20, 1996 and dictates that any capital gain is to be calculated using the difference between the selling price and the market value at the date of the commencement of the income producing activity.

Click here for more information on CGT and using your home to produce income.