Yes, you can change your primary place of residence into an investment property.
An analysis of BMT Tax Depreciation data has revealed a trend within the residential market. Homeowners are electing to convert their primary place of residence (home) into an investment property.
More than 46,000 BMT schedules over the last five years were prepared for owner-occupied properties converted to investment properties.
Why are people converting their homes into investment properties?
Converting a primary residence to an investment property is a popular investment strategy for a multitude of reasons. A homeowner may need to relocate temporarily, with the intention of returning to the residence. Another motivation includes homeowners wanting to up or downsize their home.
Some people are using first home buying schemes to secure their first property, then converting it to an investment property once the eligibility requirements of the scheme have been met i.e. they have lived in the property for twelve consecutive months before using it to produce income.
The motivation is often the desire for wealth accumulation. To make this feasible many homeowners are refinancing their home loans to access the equity in their property and using that equity to purchase a second property.
It’s important to note that once a primary place of residence is converted to an investment property a different type of home loan is required. It’s essential to consult a professional such as an accountant or home loan broker to discuss individual situations and options available.
What are the benefits?
There are many benefits when changing a primary residence into an investment property including building a property portfolio and the likelihood of capital growth, creating additional equity that will assist in the purchase of future properties.
Once a property is income producing the owners can claim tax deductions for the expenses associated with the property including interest repayments on a loan, council rates, property management fees, insurance premiums and lucrative depreciation deductions.
Depreciation deductions
Depreciation deductions can also be claimed once the primary residence has converted into an investment property. Depreciation is the natural wear and tear of a building and the assets within it over time. The Australian Taxation Office (ATO) allows owners of income-producing properties can claim this as a tax deduction.
The owners will be eligible to claim depreciation deductions for capital works deductions (Division 43), which is the structure itself and assets within it that are permanently fixed to the property, and plant and equipment deductions (Division 40) which are the assets that are easily removable or mechanical in nature.
Case study – deductions available in a typical home
• Michael purchased a new house for $730,000 just over one year ago.
• His property is rented for $650 a week or $33,800 per annum.
• Annual property expenses including interest, rates, insurance, management fees and maintenance costs total $40,000.
• Without claiming depreciation, Michael’s annual after tax outlay would be $75 per week.
• Michael can claim $15,500 in depreciation deductions in the first full financial year.
• This improves his cash flow by $110 per week, and he is now cash flow positive.
Legislative changes made in 2017 mean that owners of second-hand residential properties could no longer claim depreciation deductions on existing plant and equipment assets. This doesn’t impact newly purchased assets or capital works deductions, which make up 85-90 per cent of depreciation reports.
Many homeowners are taking advantage of spare rooms by partially converting their primary residence into an investment property, this can be one room, a granny flat, or even its entirety during peak periods. Thanks to Airbnb and similar enterprises the demand for these short-term rentals has increased, along with providing efficient platforms to advertise available rentals.
In cases where only part of a property is leased, depreciation deductions will be calculated as a percentage based on the size and period the dwelling is genuinely available for rent. Depreciation deductions are available even if the property is vacant as long as it’s genuinely available for rent.
Depreciation improves cash flow by giving investors a way to recoup some of the costs associated with property investment. Tax depreciation is the only non-cash tax deduction, meaning you don’t spend money in order to claim it. The cost of the schedule is also 100 per cent tax deductible.
BMT Tax Depreciation has prepared over 800,000 depreciation schedules and is the industry expert in helping clients maximise depreciation claims compliantly.
To learn more about the lucrative depreciation deductions when changing a primary residence into an investment property call the experts on 1300 728 726 or Request a Quote online today.
Disclaimer: The information provided in this article is general and should not be taken as advice. BMT recommend consulting an accountant before making financial decisions.
Hey
When do they count the CGT from? Say I bought my house for 600k and kept it for main residence for about a year then after a year I converted it into rental property and then the value of the house was already 800k before turning it into rentals. So when i sell it. Do i have to pay tax on those 200k or no as it was already gained value before I turned it ?!
Thanks
Hi Navjit,
Thanks for your comment.
Capital gains tax is calculated by deducting the proceeds from the cost base at the time of selling. There is a fifty per cent CGT discount for properties owned longer than twelve months.
In your scenario the property may fall under the ‘home first used to produce an income’ rule.
You may find this article on capital gains tax helpful: https://www.bmtqs.com.au/maverick/mav-52-depreciation-and-cgt
Because we’re only specialised in capital gains tax as directly related to tax depreciation, we recommend consulting an accountant or financial advisor.
Thanks,
The BMT Team.
Regarding the tax depreciation schedule which I have already, once the investment property is sold do I have to pay back some of the depreciation which has already been claimed over the past few years?
Hi Karen,
Thanks for your comment.
No, you don’t have to pay back any of the depreciation deductions you have claimed in previous years, but the Division 43 claimed will be used in the capital gains tax calculation and may increase this aspect. You will be eligible for the 50% CGT discount if held for more than 12 months which offsets the effect of adding this back in so that claiming depreciation remains beneficial in the long run.
Thanks,
The BMT Team.
What about introducing capital gains tax to a previously tax free investment. With property usually the biggest financial benefit is capital growth. Your principal residence magnifies that by being tax free. If the principal residence is then used to generate income does it then get capital gains tax? Is there any prorate – ie if it was your principal residence for 20 yrs and then it was rented out for 5 yrs?
Hi Jayson,
Thanks for your comment.
Once a property has been used to generate income, capital gains tax (CGT) will need to be calculated once the property has been sold. Properties owned for longer than twelve months are eligible for a 50 per cent discount on CGT.
There are partial exemptions available when a property was first your principal residence then used for generating income, which does in essence pro rata the time periods when calculating.
We recommend discussing this scenario with your accountant before making decisions.
Thanks,
The BMT Team.
Why does a depreciation schedule cost so much?
Hi Neil,
Thanks for your comment.
The one-off cost covers the entire process of ordering and receiving a BMT Tax Depreciation Schedule.
A BMT schedule includes a site inspection, so all claims are maximised and fully compliant with current Australian Taxation Office (ATO) regulations. The report also provides both the prime cost and diminishing value methods of depreciation.
Schedules can be amended as renovations and additions are made for a fee depending on the size or amount. You also have the option of receiving your schedule digitally which is emailed to you, a paper copy, or both.
The cost of a BMT schedule is 100 per cent tax deductible and lasts the life of the property (40 years), so you only need to order one per property.
BMT Tax Depreciation are the industry experts in tax depreciation, providing quality and compliance to clients every step of the way.
Thanks,
The BMT Team.