Moving into an investment property

There are certain scenarios where an investor can end up living in an investment property. It’s important to be wary of the rules and regulations before doing so. How a property is defined for tax purposes will affect the deductions you can claim.

Tax implications when living in your investment property

If you decide to move into an investment property and it becomes your primary place of residence (PPOR), meaning the place where you predominantly reside, you’ll need to declare this for tax purposes.

You’ll no longer be eligible to claim tax deductions for property expenses like the interest on a home loan, council rates, land taxes and repairs and maintenance. It will also eliminate any property depreciation deductions you were previously entitled to claim.

Renting out part of a primary place of residence

A primary place of residence doesn’t offer tax benefits, but what happens if you rent out a portion of the property you live in? If you lease part of your property, the rent received is regarded as assessable income.

As the property is income-producing, you’re entitled to claim a percentage of the property expenses as well as any eligible property depreciation. The percentage you can claim is based on how much of the property is being leased. For example, if you lease out a single bedroom, you can only claim expenses related to that portion of the house.

A tax depreciation schedule will outline the depreciation deductions available and an accountant will calculate the final percentage you’re able to claim based on the portion of the home producing income. 

If you decide to rent out the whole property after living in it, you won’t be able to claim for any existing plant and equipment assets as they will be deemed second-hand under current legislation. You will still be eligible to claim capital works deductions and any new assets you install once the property is being utilised as a rental property.

Living in your investment property while renovating

As mentioned above, living in an investment property can affect the depreciation deductions you can claim. Legislation introduced in 2017 states that investors are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties.

If you live in a rental property while renovating, any newly installed assets will be classed as previously used. Unless there is good reason, you should install new plant and equipment assets after you’ve move out of the property and it has been listed for rent. This will ensure you’re eligible to claim the maximum depreciation deductions available.

It’s important to note the 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective.

Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. These deductions typically make up 85-90 per cent of a total depreciation claim.

Does living in your investment property affect capital gains tax?

A capital gains tax (CGT) event occurs when an asset, including property, is sold. The timing of this is important as it determines the income year the tax will be applied.

There are certain circumstances in which CGT can be exempt. Some of the CGT exemptions relate to living in your investment property. For example, if a property is considered your primary place of residence, you’re entitled to a full CGT exemption.

If you move out of a primary place of residence and rent it out, you’re exempt from CGT for a period of up to six years. If you move back into the property and afterwards move out again then a new six year period commences from the time you last moved out.

There are also exemptions from CGT if you consider more than one property to be a primary place of residence within a six month period. To be eligible, you must meet one of the below conditions:

• The old property was your primary residence for a continuous period of at least three months in the twelve months before they sold it
• You did not use the property to provide assessable income in any part of the twelve months prior to selling.

To find out more about CGT, read When do you pay capital gains tax on investment property?