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.
Renting out part of a primary place of residence
Living in your investment property while renovating
Does living in your investment property affect capital gains tax?
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
Hi BTM,
I am seeking your advice please.
We have put our primary place of residence ,say property 1 for rent and have moved into our investment property, say property 2, to live in and intent to use this property as our main residence.
Please note, Property 1 had been fully paid off and Property 2 currently borrow 100%. We would like to know if we can use rental income from Property 1 to offset with the interest on Property 2? . In other words, we want to apply for the new loan against property 1 (so we can claim interest against its rental income) and put this loan to reduce the debt of property 2.
Thanking you in advance and looking forward to your advice
Regards
Jenny Nguyen
Hi Jenny,
Thanks for your comment.
Unfortunately, we are unable to provide advice on this topic. We recommend discussing this with your accountant or financial advisor.
Thanks,
The BMT Team
fact 1: If I buy a property with my friend. My friend live in this property for 6 months then rent it out as an investment property for 4 years. Then sell the property.
Question 1: do I have to live in this property for the first 6 months to entitle to full exemption of CGT?
fact 2: If I buy a property with my friend. My friend live in this property for 6 months then rent it out as an investment property for 4 years. Then I move into the property as Primary residence. Afer 15 years, We sell this property.
Question 2: do we entitle to full exemption of CGT? or part exemption of CGT? Does my friend have to live in this property with me to entitle for exemption of CGT?
Fact 3: If I buy an invemestment property and rent it out, then in year 4, I move into this property as primary residence. In future selling of this property.
Question 3: Do I entitle for part exemption of CGT?
Thanks
Hi Paul,
Thanks for your comment.
There are a number of factors that impact whether a homeowner is eligible for the main residence exemption.
Some factors include the period it was used as a main residence, how and when it was used to produce income and the homeowner’s residency status for taxation purposes.
We recommend discussing this with your accountant as they can provide further advice on how CGT is calculated and how exemptions are applied.
Thanks,
The BMT Team
Thanks for your great article
I have a question regarding my current situation. I have my townhouse and planning to purchase home and land package so once ready I’ll be move in to this new house and convert my townhouse as an investment property.I am going to redraw money from townhouse loan account to pay deposit for my new house so it is still good if I claim the Tax on the whole amount after converting as an investment? Should I turn my current property as an investment or sell? I am more interested in Negative Gearing to save tax on my income.
Looking forward to your reply.
Regards,
Nirmesh
Hi Nirmesh,
Thanks for your comment.
Tax deductions for interest repayments can only be claimed for the investment portion of a mortgage. Therefore, if you use part of your investment property’s mortgage to pay the deposit on your own residence, you can’t claim a deduction for that portion of interest repayments.
We recommend discussing any further questions you have on how to claim tax deductions and negative gearing with a trusted accountant or financial advisor.
Thanks,
The BMT Team
Great article, very much appreciated.
I have a current situation that I hope you may be able to help with.
The tenants moved out of my investment property which was purchased purely as a negatively geared rental asset. I have spent 3 months renovating with the intention of selling, however, I am concerned the property may not sell. If it does not sell, I am considering selling my principal place of residence and moving into the investment property.
I understand CGT is applicable when I eventually sell the property but I’d like to know if all the capital works and selling costs I’ve incurred prior to moving into the property can be added to the cost of the property for CGT value.
I also believe I should have the investment property professionally valued at the time of moving in for CGT purposes. Is this correct?
Many thanks in advance.
Hi Sheryl,
Thanks for your comment.
This is a complex area and only your accountant can advise on how CGT is applied once a property is sold. They can also discuss CGT discounts and exemptions that may apply to you.
Thanks,
The BMT Team
Hi,
I purchased a property in June 2013 and rented it out immediately for 12 months. After that time it was my principal home until November 2018 at which time I sold the place. I have already paid the CGT.
I have just learned that all the interest payments that I had been making, after making it my principal home gets added to the cost base, as per section 110-25(4).
Is this true? And if that’s the case, are expenses like strata rates and council bills get added to the cost base as well.
Many thanks
Hi JW,
Thanks for your comment.
As the property became your principal home again it was a personal asset. This means the element you mentioned under section 110-25(4) doesn’t apply.
Thanks,
The BMT Team
Hi I lived at my new built home for 18 months, if I decide to rent it out for 1 year ,how long I have to live in there again before selling to get full exemption of CGT?
Hi Robby,
Thanks for your comment.
Determining whether someone is eligible for the main residence exemption is made on a case-by-case basis due to the various conditions that may apply. It is not based on how long you live there but how long you rent it out for and if it is still considered your main residence based on the circumstances.
We recommend discussing this with your accountant as they will be able to give you further advice.
Thanks,
The BMT Team
I bought investment property and i want to use as main residence….the main residence which i have now want to sell.
Are there any stamp duty do i need to pay?because o want to keep only 1 property so want to sell my main residence and want to move into invesent property use as main residence…please advice me..thank you
Hi Mohammed,
Thanks for your comment.
Generally, you only need to pay stamp duty when you purchase a property. As you already own the investment property that you’re making your main residence, you shouldn’t need to pay stamp duty.
Thanks,
The BMT Team
Gday! I bought an investment property townhouse last 2004 , rented it out then moved to the property and made it as my primary residence 2012. Just wondering how do I compute the CGT for this kind of situation. Thanks.
Hi Ernesto,
Thanks for your comment.
You may be eligible for the main residence exemption. However, we recommend you get in touch with your accountant as only they can confirm this.
Thanks,
The BMT Team.
Hi there
We have leased our primary place of residence and are moving to our investment property. However the house that is on our investment property is rented out and we have been approved by council to have a 2nd dwelling on the property. We will be building our home there. How will this affect us tax wise etc? Appreciate your help.
Hi Margaret,
Thanks for your comment.
In this scenario, you can still claim depreciation on the investment. If there are any ‘shared areas’ between you and your tenants (e.g. driveway), depreciation will need to be apportioned for these areas only.
Any expenses that apply to both properties (e.g. land tax) will also need to be apportioned when claimed as tax deductions. Your accountant will be able to help you with this come tax time.
Thanks,
The BMT Team.
Hi BMT, we have our depreciation schedule done by you.
We moved in our investment property to live for 10 months while waiting for our house to be constructed. But now we decided to stop the construction and relocate to work overseas. How different we can claim for the depreciation of this investment property this financial year?
We now also decide to sell the land which we planned to construct our house. At the time the land is setled, we will be overseas and considered as non-resident for tax purposes. Do we pay the full CGT or we will still have the discount CGT? Thank you!
Hi Phuong,
Thanks for your comment.
You will only be able to claim depreciation on the property while it is used as an investment (not while you live there). If you rent the property out again once you relocate overseas eligible depreciation deductions will be accounted for in your yearly Australian tax return.
There are some special CGT rules if you’re a foreign resident for tax purposes. This page on the ATO provides further information: https://www.ato.gov.au/general/capital-gains-tax/international-issues/foreign-residents-and-main-residence-exemption/ . We also recommend getting in touch with your accountant who will discuss the process when it comes time to sell the land.
Thanks,
The BMT Team.
Hello Team,
We have had an investment property for about 15 years and it has become a bit tired ! We plan to move into it for 6-12 months and renovate it.
It is worth about $600,000 now but by spending $50-80,000 we think we can add $150,000 to its value. We will then sell the property.
My question relates to CGT, can we have the house valued when we move in and use that value to base the Tax on ?
I believe money spent on the property whilst we are living there is not tax deductible but I do not believe we should pay CGT on our gains that are dollars spent.
Thanks,
Ray
Hi Ray,
Thanks for your comment.
If the property is classed as your main residence at the time of sale you might be eligible for the CGT main residence exemption.
It would be best to discuss this with your accountant as they can also provide advice on what the property’s value will be based on.
Thanks,
The BMT Team
Hi, we have just purchased an investment property with a pool that was not compliant. You cannot rent a property until the pool is certified. We had to replace the fence to make it compliant and now it is rented. Can we claim that as an expense at 100%?
Hi Trish,
Thanks for your comment.
As these expenses were incurred to make the property suitable to be rented out and did not arise from the use of the property to generate rental income, the expenses are capital in nature and are not able to be claimed as a deduction for these expenses.
Instead, you will be able to claim depreciation on the fence as capital works each year.
Thanks,
The BMT Team
Hi
Thank you for posting this article.
I had a question re: the following scenario if you could shed some light.
I had a property I purchased approx. 20 years ago and moved in as owner occupier. 3 years later I had to move back to my parents home to take care of them and rented my property out.
My property has been consistently rented for 12+ years.
If i move back into my rental property, how long do I have to live there before I can sell it and avoid paying capital gains, or at the very least, reduce the amount I have to pay.
thank you kindly
Hi Vicky,
Thanks for your comment.
There is no ‘set’ time frame that you need to be living in a property to be eligible for a full or partial main residence exemption. The ATO assesses this on a case-by-case basis.
However, you should be eligible for the 50 per cent CGT exemption upon sale if the property is sold at a capital gain.
For any further CGT questions, we recommend getting in touch with your accountant as they will be able to provide further advice.
Thanks,
The BMT Team
Hi BMT Team. Thanks so much for your helpful article. I wondered what happens when calculating CGT for a property we bought to live in (not intended as an investment property), stayed 1.5 years, then moved out (due to work providing us with residence) and rented it for 3,491 days (almost 10 years). We have since moved back in and have lived in it continuously for 3,948 days. Upon selling do we pay 50% CGT on the difference of the value of the property between when it became available to rent plus six years, and when we moved back in? Thanks so much for your assistance, Jenny
Hi Jenny,
Thanks for your comment.
We aren’t able to provide advice on this scenario. We recommend getting in touch with your accountant as they will assess your situation and explain what will happen in terms of CGT when the property is sold.
Thanks,
The BMT Team