Introduction: Why It Matters
Thinking of earning extra income by renting out a room or running your business from home? Great – but have you considered how it affects your mortgage and future tax position?
This blog breaks down exactly how using your home to produce income affects your main residence CGT exemption, and how to calculate your net capital gain step-by-step.
How CGT Applies to Your Main Residence
Your main residence is usually exempt from CGT if you’re an Australian resident.However, if you rent out part of your home or run a business from it, even temporarily, you may lose part of that exemption.
When CGT Applies:
- Renting out a room (including through Airbnb or similar)
- Running a business with a dedicated space (not just a home office)
- Claiming deductions for home loan interest or business expenses
Good news: If someone else earns income from your home (e.g. family using a room for business) but you don’t receive any income, you still qualify for the full exemption.
Key Tests to Determine CGT Liability
| Test | What It Checks | Implication |
| Interest Deductibility Test | Would you be entitled to claim home loan interest for the income-producing part? | If yes, that portion is subject to CGT |
| Space Usage | Is the space used exclusively and permanently for business? | If yes, that area attracts CGT |
| Adaptability | Can the space be easily used for private purposes? | If yes, may not be CGT-exempt |
Working Out Your Capital Gain or Loss
Follow this 6-step method to work out your net capital gain if you used your home to produce income:
Quick Steps
- Capital Gain = Sale Price − Market Value when first used for income
- Portion of Area Used = % of floor space
- Adjust for Time Used (if not used up to sale date)
- Multiply: Step 1 × Step 2 × Time Ratio
- Apply 50% CGT Discount (if held >12 months)
- Result = Your Net Capital Gain
Important: You must get a market valuation the day you start using the property to earn income (if after 20 Aug 1996).
Market Valuation & First Use Rule
If you start earning income from your home after 20 August 1996, you’re considered to have re-acquired the property at its market value on that date.
- This is called the home first used to produce income rule
- Without a proper market valuation, you can’t correctly calculate your capital gain
If you sell within 12 months of starting to earn income from the property, no CGT discount applies.
Mortgage Tip from Finnex
Using your home to earn income may impact your property’s valuation and equity – which could affect how much you can borrow or refinance. Talk to a mortgage specialist before you make the switch.
When a Rental Property Becomes Your Home
You’re only entitled to the main residence exemption for the period you actually lived in the property.
Example: Farnaz, Bought a property in 2018, rented it for 2 years, then lived in it.
| Capital Gain | Rented Days | Total Days Owned | Assessable CGT | After 50% Discount |
| $538,500 | 757 | 2,355 | $173,097 | $86,548 |
Summary: What You Need to Remember
- Using your home to earn income reduces your CGT exemption
- Calculate your CGT based on: % of home used, Time used for income, Market value at first use (if applicable)
- Get a market valuation when income use starts
- You may still qualify for small business CGT concessions
- Keep good records and consult a registered tax agent
Need Help?
This stuff gets complex – especially with changing use and deductions. To make sure you’re maximising your exemptions and staying compliant, consult a registered tax agent
