If you run your business from home you can claim the running costs safely. You may also be able to claim occupancy costs like mortgage interest and rates, and that is the one to be careful with. Being eligible to claim them is what hands back part of the capital gains tax exemption on your home, permanently, whether or not you actually claim. Often it is not worth it.
Two buckets, and only one of them is dangerous
Everything you might claim for working out of your house falls into one of two categories, and confusing them is where the money goes.
Running expenses. Safe, and yours.
The cost of using the house while the business operates in it: electricity and gas, cleaning, phone and internet, stationery, and the decline in value of your desk, computer and office furniture. You claim the work related portion.
These have no capital gains tax consequences at all. Claim them and your home stays completely exempt.
Occupancy expenses. Available to a home based business, and the trap.
The cost of having the house: mortgage interest, rent, council and water rates, land tax and house insurance. Claimed on a floor area basis.
A genuine home based business is far more likely to qualify for these than any employee ever is. That sounds like good news. It is also precisely the problem.
Want the actual running expenses figure? The ATO’s own calculator does that sum properly, for both the fixed rate and the actual cost method. It is the one to use when you want a number you can rely on.
The test that decides it: is it really a place of business?
Occupancy expenses only become available where an area of your home is set aside and used exclusively as a place of business. The things the ATO looks at are practical:
- The area is clearly identifiable as a place of business
- It is not readily capable of being used for private or domestic purposes
- It is used exclusively or almost exclusively for carrying on the business
- It is used regularly for visits by clients or customers
A converted garage with its own entrance, a sign out the front and a customer counter is a place of business. A laptop on the kitchen bench is not. The room that is an office four days a week and a spare bedroom when your daughter visits is not either, and that is the one people argue about.
Two businesses, one street apart
Both of these are ordinary Albury set ups. The difference between them is one word, exclusivity, and it decides whether the house stays exempt.
| Trish, bookkeeper | Dave, landscaper | |
|---|---|---|
| The space | The converted garage, about 10% of the floor area, its own entry, desk and filing | A desk in the spare room, where he keeps his job files |
| Used for anything else? | No. Clients come to it | Yes. It is still the spare room when the grandkids stay |
| Can claim occupancy costs? | Yes, 10% of mortgage interest, rates and insurance | No |
| Running costs, power and internet | Yes | Yes, all of them |
| When they sell | 90% of the gain exempt, 10% is not | Fully exempt |
| The partner’s share | Wayne is not in the business, so his share keeps the full exemption | Not affected |
Dave is the better outcome for most people, and he gets there by doing nothing special. He still claims all his running costs, the power, the internet, the phone, the desk and the computer. He simply does not have a room that is off limits to the rest of his life.
The principle behind both is the ATO’s, and it publishes its own worked examples along the same lines. We have written ours around the sort of businesses we actually see.
How the law actually measures it, and the part that surprises people
The provision that does this is section 118-190, and it is worth understanding because of how it is written. You get only a partial exemption where three things are true:
- The dwelling was your main residence for a period, and
- it was used to produce assessable income during all or part of that period, and
- if you had borrowed to buy it, you could have deducted some or all of the interest.
Read that third one again. It is hypothetical. It asks what you could have deducted, not what you did. Two things follow, and both catch people out.
Having no mortgage does not save you. The test still asks whether interest would have been deductible if you had borrowed. Owning the place outright does not take you outside it.
Not claiming does not save you either. The test is about what was deductible, not what appeared in your return. This is the single most expensive misunderstanding in this whole area, and it is why we keep saying the decision is about how you use the room, not about what you put on a form.
The measurement has two dimensions, not one
The law does not set out a rigid formula here. Section 118-190 says the gain is increased by an amount that is reasonable, having regard to how much of that interest you could have deducted. In practice, reasonable is worked out on two things together: the business share of the floor area, and the proportion of your ownership period the space was used that way.
Most explanations mention floor area and stop. The time half matters just as much. To show the shape of it, take someone who owns a home for 3,000 days and uses a quarter of it as a place of business for the first 1,000 of those days. On a $30,000 gain the taxable slice works out as:
$30,000 x (1,000 / 3,000) x 1/4 = $2,500.
That is the good news buried in all this. Stopping matters. Set a room aside for three years of a twenty year ownership and you are exposed on three twentieths of it, not the lot. People who think one year of business use permanently taints the whole house are wrong, and people who think they can undo it by not claiming are also wrong.
Because it turns on what is reasonable rather than on a set sum, this is a genuine judgement about your facts. It is also why keeping a note of when the room started and stopped being used that way is worth doing at the time, not a decade later.
Do the arithmetic before you claim, not after
This is the calculation almost nobody does, and it is the one that matters. To make it readable we have to fix some assumptions, so here they are stated plainly: a sole owner of the property, 10% of the floor area used exclusively for the business for the whole of a ten year ownership, occupancy expenses of $12,000 a year, a 37% marginal rate, and a sale before 1 July 2027.
The deduction side. Ten per cent of $12,000 is $1,200 a year, worth about $444 a year at 37%. Over ten years, roughly $4,400.
The other side. Say the place cost $600,000 and sells for $1,000,000, an increase in value of $400,000. That is not quite the capital gain, because the cost base also picks up stamp duty, legal fees, selling costs and any capital improvements, all of which reduce it. Taking the $400,000 as a rough stand in, 10% of it is exposed, so $40,000. Halved by the capital gains tax discount, that is $20,000 taxable, and about $7,400 of tax at 37%.
Roughly $4,400 saved along the way, roughly $7,400 handed back at the end. And that is a modest example. On a house that has done better, or a business run from home for twenty years rather than ten, the gap widens.
Change the assumptions and the numbers move a long way. If you own the place with a partner who is not in the business, only your share is exposed, so on a half share the tax above roughly halves. That is the situation in the ATO’s own Elena example, and it is the common one.
A timing point, and it is better news than it first sounds. The 50% capital gains tax discount is being replaced by cost base indexation for gains accruing from 1 July 2027, under legislation that received Royal Assent on 26 June 2026. That does not mean the discount disappears from your calculation.
Growth up to 1 July 2027 keeps the old treatment, including the 50% discount, even if you sell years later. Assets held at 30 June 2027 are treated as sold and immediately bought back at that date, so the gain to then is locked in under the current rules and simply deferred until you actually sell. Only growth after that date moves to indexation. So a sale during the current financial year gets the discount in full, and a sale in 2035 still gets it on everything that accrued before July 2027.
We have written the change up properly in what the 2027 capital gains tax changes mean for you, including the valuation choice you get to make. If you would rather just find out whether it affects you at all, selling before July 2027, or after answers that first.
Sometimes claiming still wins. If you rent, there is no main residence exemption to protect and the calculation changes completely. If the business use is large and the property is unlikely to appreciate much, it can stack up. But it is a calculation, and it deserves ten minutes with someone who can do it properly.
Two things people assume that are not true
“Claiming a home office gets me the small business CGT concessions”
Not automatically, and often not at all. Minor or incidental business use of your home will generally not make the property an active asset, and the small business capital gains tax concessions need an active asset plus a list of other conditions. An area genuinely set aside for the business can count toward it, so this is not impossible, but treat it as something to be established on your facts rather than a benefit that arrives with the deduction.
“I can decide at sale time whether to have claimed it”
No, and it is worse than that. The exposure follows from being eligible to claim, which comes from how the space is actually used. It does not depend on whether you put the deduction in your return. Deciding at the end not to have claimed does not undo it. You would give up the deductions and keep the exposure, which is the worst available outcome, and it is why the decision belongs at the start rather than at the sale.
You also need to keep the records for the entire period you own the home and for at least five years after you sell it. That is a long time to hold paperwork for a decision made casually.
If you are an employee rather than a business
Different rules, and much tighter. Employees generally cannot claim occupancy expenses at all, and the Full Federal Court confirmed how hard that line is in 2026. We have set that out in claiming home office expenses as an employee, along with the 70 cent fixed rate and the records you need.
If you are not certain which side of the line you are on, our home office deduction checker sorts it out in about a minute and tells you whether your house is exposed.
Do the sums before you claim against the house
Bring us your floor plan, what the room is actually used for, and roughly what you paid for the place. We will work out whether an occupancy claim puts you in front or behind, and we will tell you plainly which it is.
Level 1, 561 Olive Street, Albury NSW 2640. Registered Tax Agent 20651000.
Sources: the ATO’s guidance on deductions for home-based business expenses and on home-based business and CGT implications, checked on 9 September 2026. The Elena and Olga examples are the ATO’s own. The worked figures in this article are illustrative and are not a prediction about any particular property. This is general information and not advice about your circumstances.
