Working From Home? There Is a Capital Gains Tax Sting

And it has nothing to do with whether you claim a deduction.

If you run a business from your home — family day care, a consulting practice, a hairdressing chair in the spare room — there is a fair chance you have assumed something reassuring and wrong.

The thought process usually goes like this: as long as you don’t claim any deductions for the house, you won’t pay capital gains tax when you sell it. That is not how the law works.

The main residence exemption is reduced where you would have been entitled to claim interest on a loan used to buy the home, had you borrowed. It is a hypothetical test. It does not ask what you actually claimed, or even whether you have a mortgage.

What matters is the character of the space. If part of your home has genuinely become a place of business — a dedicated room, a sign out the front, clients coming and going — the exemption is reduced whether or not you claimed. If nothing is set aside and you work at the kitchen table, occupancy costs were never deductible anyway, and the exemption survives intact.

So the deduction is not what creates the tax. Both are caused by the same underlying fact. Turning down the deduction does not save you — it just means you paid for the problem twice.

Three Ways Out

●      Prevention. Never set aside a specific area for the business. Cheapest, but it costs you the deductions and is not always practical.

●      The small business concessions. On sale these can often reduce the taxable portion to nil — and with the fifteen-year exemption, the proceeds can go into superannuation as well.

●      Estate planning. Where the dwelling is your main residence at your death and is not being used to produce income at that moment, the earlier income-producing use is disregarded entirely.

Note what that means. Options two and three let you keep every deduction along the way and still pay nothing. On the numbers, they beat prevention.

But both depend on facts you may not control — your asset position in the year you sell, and when the sale happens. Illness, divorce or aged care arrive without warning, and neither concession is automatic. Land tax is a separate problem again.

None of this is a reason to avoid working from home. It is a reason to stop taking comfort from never having claimed.

If you run any part of a business from home, talk to us before you sign a contract of sale, not after.