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?
Dear Sir/Madam
I always love your articles. They are very informative. FYI – BMT have prepared schedule for me and my friends investment properties.
I have a question as follows:
Scenario – I want to move and live in my investment property 1 from my primary residence. I then want to sell investment property 1 and move on to live in investment property 2. I sell investment property 2 and move on to live in investment property 3, etc. I then move back to my primary residence after selling all investment properties. According to my simple “will”, on my death my primary residence passes to my children who now leaves in their own homes (not with me).
Q1 – Can I do that i.e. move from investment property to investment property and sell them?
Q2 – If yes, then will I be paying CGT on those sold investment properties?
Q3 – How long I must stay in the investment property to be considered CGT free?
Q4 – Once I move back to my primary residence and live in for a while and then sell it. Will I be paying CGT?
Q5 – Will my children be required to pay stamp duties on transfer of title of primary residence?
More keen on answers to Q1 to Q4.
I will much appreciate your feedback.
With kind regards.
Rajesh Chandra
Hi Rajesh,
Thank you for your comment.
If you move into your investment property and classify it as your primary place of residence before selling it, you can only claim a CGT exemption if you originally purchased that property as an owner occupier. If this is the case, you may qualify for the six year rule, keeping in mind you can only have one primary place of residence at any given time. Here’s some further reading on CGT exemptions:
• https://www.bmtqs.com.au/cgt-exemptions
• https://www.bmtqs.com.au/bmt-insider/when-do-you-pay-capital-gains-tax-on-investment-property/
Regarding your stamp duty question, from what we have seen when our clients are dealing with a similar situation, stamp duty is not applicable in a deceased estate transfer. However, we’re also aware that this is not always the case. Not being our area of expertise, we recommend seeking the advice of a trusted accountant or financial planner as well as a lawyer who specialises in the area. They will be able to inform you of the regulations and advise you on the best course of action.
Thanks,
BMT Team
Hi BMT, could you please clarify if tax deduction can be claimed for depreciation for year 2-3 and why?
The reason of this arrangment is the apartment will be owned under my title from year 0-1, and once my husband obtained his permanent residency, i would add his name to the title during year 1-2, the property will be rented out again from year 2 onwards. Thank you.
year 0-1: brand new apartment as an investment property
year 1-2: principal place of residence
year 2 onwards: investment property
Hi Tiffany,
Depending on the age of your property, during year 2-3 you may be able to claim capital works (division 43) deductions which relate to the building structure and items considered to be permanently attached to it.
However, as you have lived in the property as a primary place of residence you won’t be entitled to claim depreciation for any existing plant and equipment assets as they’ll be classified as previously used. You can still claim any new assets you purchase once the property is being rented.
Given that capital works typically make up 85 to 90 per cent of a claim, it’s still worth enquiring about the depreciation deductions on offer.
Thanks,
BMT Team
Hi,
We recently purchased an investment property which we are renting and will move into it within 9 months, it will be aim our PPOR.
How will this affect us with CGT in the future please?
Hi Benita,
It’s worth discussing CGT with a trusted accountant as they’ll be able to assess your finances and circumstances in more detail.
Based on the information you’ve provided, as the property was originally an investment, you will not be eligible for the full main residence exemption. Capital gains tax will need to be calculated if the property is later sold.
Thanks,
BMT Team
Hi BMT,
Great article! Thanks for sharing with us your insights. I have a question about renting our my primary place of residence before the 12-month period.. What if I rent out my home without staying in it at all? I constructed it using the first-home stamp duty waiver and got my loan approved as a first-home buyer loan with 5% deposit. I want to rent this out now, what are the implications?
Alternatively, if I rent out only part of my home and I live in it as my primary place, what are the implications?
Thank you
Hi Thomas,
Thanks for your comment. Given your home loan is for an owner-occupier property and used the first-home stamp duty waiver, we recommend speaking with your accountant about turning the property into an investment. There may be requirements regarding the length of time you’re required to live in the property.
From a purely depreciation perspective, if you move out of a main residence and lease the property, you can only claim the capital works component. This is because the plant and equipment assets are deemed as previously used under current legislation.
If you lease part of the property while still living in it, you will have to had it leased before or on the same day as you move in to claim the plant and equipment. If you move in first and then part lease it the deductions will again be denied.
In the first scenario you will be entitled to claim a percentage of the plant and equipment assets and capital works. This percentage will be based on how much of the property is being leased and used. A tax depreciation schedule will outline the deductions available and your accountant will discuss the final percentage you’re able to claim based on your financial position.
Thanks,
BMT Team