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 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.