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?
Scenario: Purchasing a property that will be rented to various guests in a hotel letting pool initially then after 3-4 months will become our PPOR.
For the purchase is it classified as an investment and you have to pay the higher stamp duty rate? If the higher stamp duty is paid then presumably interest and the like would then be tax deductible? Does the duration of only 3 months letting come into play?
Hi Fred,
Thanks for your comment.
If you’re planning to rent the property initially, it will need to be classified as an investment loan at the time of purchase. Tax deductions are available for the time the property was used to produce an income or is genuinely available for rent.
We recommend consulting an accountant or financial advisor to determine the classification and available tax deductions.
Thanks,
The BMT Team.
hi
i started living in my investment property after renting out for 2.5 years. i been living in property for 2 years as of today . i have never owned any other house at all . Do i have to pay CGT when i sold my investment property?
Hi Ank,
Thanks for your comment.
As you first rented the property after purchase then you will not be entitled to the full CGT exemption.
However, you could be eligible for a fifty per cent discount to CGT in the event of selling as you’ve owned the property for longer than twelve months.
For more information, visit:
https://www.ato.gov.au/individuals/capital-gains-tax/property-and-capital-gains-tax/your-main-residence-(home)/treating-former-home-as-main-residence/
Thanks,
The BMT Team.
Hi I’m looking at buying a primary place of residence, the house currently has tenants with their lease up in 3 months which we will move in directly and rent out our current house. Will I have to pay investment stamp duty and CGT?
Hi Matthew,
Thanks for your comment.
You will be required to pay transfer duty (previously known as stamp duty) as per normal.
With the property being rented for that initial period before you make it your PPOR, there will be future CGT implications when the property is sold.
Thanks,
The BMT Team.
What happens if a property is your POR for 4 years and then rent it out for 10 years. If you want to move back in, how long until it can become your POR, and what are the CGT rules around that?
Hi Anna,
Thanks for your comment.
The house will qualify as your PPOR after six consecutive months of occupation, as long as you don’t use or occupy another residence in that time.
As it had been rented for greater than 6 years there will be CGT implications though should be entitled to a partial main residence exemption.
Thanks,
The BMT Team.
I’ve just purchased a townhouse as an investment property in Victoria. The corresponding loan is also for an investment property. When am I able to move in and use this property as my primary residence?
Hi Chelsea
Thanks for your comment.
When you decide to make an investment property your principal place of residence, you need to notify the Australian Taxation Office.
It will mean that you no longer have to declare rental income and cannot claim any associated tax deductions.
Before doing anything you should consult your accountant to discuss any potential tax implications.
Thanks,
The BMT Team.