Introduction

Owning your own home in Australia usually comes with a valuable benefit: a full Capital Gains Tax (CGT) exemption when you sell it, provided it’s your main residence. However, things change when you decide to rent out part of your home or run a business from it. In such cases, you may only qualify for a partial CGT exemption, which means part of the profit you make when selling may be subject to tax.

In this Blog, we will break down how capital gains tax for property in Australia works when you earn income from your home, key rules like the “home first used to produce income rule,” real-life examples, and what this means for your rental property tax return.

A modern Australian suburban home with a neatly landscaped front yard, captured in bright natural daylight. In the foreground, a glass garden table holds a calculator and tax documents, symbolising capital gains tax considerations when renting or using a home for income.

How Capital Gains Tax Applies to Your Main Residence  

Your home, when used solely as your primary place of residence, is fully exempt from CGT. However, if you:

  • Rent out part of your home, or
  • Run a business from home, you may lose part of your CGT exemption. Instead, you’ll be entitled to a partial main residence exemption.

This means when you sell your property, the portion of the home used to produce income becomes taxable under capital gains tax for property in Australia.

Interest Deductibility and the CGT Test  

To determine whether CGT applies, the ATO uses the interest deductibility test.

This asks: Would you be entitled to claim a deduction for interest on a home loan if you had borrowed money to buy your home?

  • If yes, then CGT applies to that portion of your home.
  • If no, you may still be entitled to a full exemption.

For instance, if you rent out a room, part of your home is deemed income-producing. Similarly, if you run a business with a fully set-aside office space (like a doctor’s surgery at home), the space used is also subject to CGT when you sell.

Renting Out Part of Your Home  

When you rent part of your property:

  • You can claim deductions (like loan interest, electricity, etc.) proportional to the floor area rented.
  • However, the same proportion will be subject to CGT when selling.

Example:

Thomas bought a property for $300,000 and sold it for $700,000 after using 35% of the home for rental purposes the entire time. His capital gain was $400,000, with 35% assessable = $140,000. After the 50% CGT discount, his net capital gain was $70,000.

This gain must then be declared in his rental property tax return.

Running a Business From Home

Running a business at home (such as a consultancy) changes how the ATO views CGT:

  • You’re only eligible for a full exemption if you’re not entitled to claim deductions on loan interest.
  • If part of your home is clearly identifiable as a business space and not adaptable for private use (like a clinic), then CGT will apply proportionally on sale.

Example:

Fatima used 40% of her home for her consultancy business, then stopped before eventually selling. She calculated a net taxable capital gain of $10,003 after applying all calculations and the CGT discount.

The ‘Home First Used to Produce Income’ Rule  

In most cases, when you first start using your home for income (after 20 August 1996), you are considered to have acquired it at its market value at that point. This valuation is crucial when calculating CGT at the time of sale.

Exceptions apply if:

  • You inherited the property from a deceased estate and sold it within 2 years.
  • You always rented from the time of purchase (different rules apply).
  • You chose the “continuing main residence” option after moving out.

Example:

Erin lived in her house until 2024, then started renting it out when the market value was $650,000. She sold it for $696,000 within a year. Since she sold within 12 months of first renting it out, she couldn’t access the 50% CGT discount.

Rental Property Becomes Your Main Residence  

If a rental property later becomes your home, your CGT liability applies only to the period it was rented.

Example:

Farnaz rented a property before moving into it as her own home. When she sold it, her assessable capital gain was $173,097. With the CGT discount, her net taxable capital gain was reduced to $86,548 in her 2025 rental property tax return.

Key Takeaways on CGT and Your Home  

  • Using your home for income means partial, not full, CGT exemption.
  • The interest deductibility test is at the heart of determining CGT liability.
  • Record-keeping is critical: keep valuations and expense records to calculate your capital gains tax for property in Australia accurately.
  • You may also apply small business CGT concessions if operating a business from home

Final Thoughts  

Managing property tax in Australia, especially when balancing private and income-producing use, can be complex. Whether it’s calculating your rental property tax return or applying the home first used to produce income rule, being informed will help you maximise exemptions and avoid surprises.

Professional guidance from tax specialists such as Tax NextGen can make navigating capital gains tax for property in Australia much easier. Always keep clear documentation and consider professional valuations when necessary.