If you ran a business from home in a way that let you claim occupancy costs, selling that home usually triggers capital gains tax on the part you used for the business. Your home is normally free of CGT under the main residence exemption, but that exemption shrinks for the business-use portion. How much you pay comes down to how much of the home was used, for how long, and whether the space was a genuine place of business or just a home office used for convenience. If it was only a convenient home office and you never claimed occupancy costs, you generally keep the full exemption and pay no CGT.
Does working from home actually cost you the exemption?
Not always, and this is the part that decides everything. The exemption is only reduced if the business use was the kind that let you claim occupancy costs, meaning a share of your mortgage interest, rent, or council rates. That usually requires part of the home to be a genuine place of business, such as a consulting room, a treatment room, or a workshop that is set aside for the business and not really suitable for private use.
If you simply worked at the kitchen table or used a spare room that doubled as a study, and you only ever claimed running costs like electricity and internet, that does not reduce your exemption. The test the ATO applies is whether you could have claimed a deduction for your home loan interest. If you could, your home is exposed to CGT to the same extent. If you could not, your home stays fully exempt.
How much of the gain is taxable?
The taxable slice is worked out from two things: the share of your home’s floor area used for the business, and the length of time you used it that way.
Here is a simple example. Say you bought your home for $600,000 and later sell it for $1,000,000, a gain of $400,000. You used 15% of the floor area as a place of business for the whole time you owned it. That makes 15% of the gain, or $60,000, fall outside the main residence exemption. Because you owned the home for more than 12 months, you then apply the 50% CGT discount, which halves that figure to $30,000. That $30,000 is what gets added to your taxable income for the year. The other 85% of the gain stays exempt.
If you only ran the business for part of the ownership period, the taxable portion is scaled down again for the time it was actually used for income.
The rule that can quietly save you a lot
If you did not start the business until years after you bought the home, there is a rule that usually works in your favour. When you first use your home to produce income, you are generally treated as having bought the income-producing part at its market value on that day. That means only the growth in value from the day the business started counts toward CGT, not the growth from when you first bought the place.
To rely on it, the home needs to have been bought on or after 20 September 1985 and first used for the business after 20 August 1996, and you would need to have qualified for the full exemption up to the point the business use began. The practical step is simple: get a property valuation at the time the business use starts, because without that figure the rule is hard to use years later at sale.
The trade-off most people miss
There is a decision buried in all of this. The occupancy costs you can claim while running the business, the slice of mortgage interest, rent, and rates, come from the space being a genuine place of business. That is the very thing that later exposes part of your home to CGT. If you keep the space as a convenient home office and do not claim occupancy costs, you generally hold on to the full exemption.
So it is a deduction now against a possible tax bill later. For a modest deduction on a home that is climbing in value, the future CGT can easily outweigh years of occupancy claims. This is worth modelling before you commit to claiming, not after you have sold.
Can you reduce the CGT?
Partly. The 50% CGT discount applies whenever you have owned the home for more than 12 months, and as the example showed, it halves the taxable portion of the gain. That is the main lever for most people.
The small business CGT concessions, which can reduce a business capital gain to nothing, sound like they should apply here, but they rarely do for a family home. The ATO tests whether the whole property is an active asset, not just the room you worked from, and a home usually fails that test. Our overview of the small business CGT concessions explains where they genuinely help, so you can see why a home is usually not one of those cases. In short, plan around the main residence rules and the 50% discount rather than banking on the concessions.
