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?
Hi,
I have an investment property I live in for 7.69% of the year (holidaying). I continue to pay rent at my PPOR so don’t consider the investment property to be my PPOR. What are the tax implications for me?
Pere.
Hi Pere,
Thanks for your comment.
Your investment property would be available for depreciation deductions on eligible assets while it is income producing. You would not be able to claim depreciation for the length of time it is used for private purposes.
There may be CGT implications involved. It’s important to discuss any questions you have about CGT with your tax adviser or accountant as they can provide financial advice regarding your specific investment scenario.
Thanks,
The BMT Team
Hi BMT
I am new to your site/business and loving all the educational articles you publish.
My partner and I are moving into our investment property which comprises of 2 x 2 bedroom units on one title that were built in 1982. We are planning on moving into one unit and renting out the other.
I would be grateful if you could respond to my questions:
– is a depreciation schedule worthwhile given they were built before 1987?
– if we were to get one done for the unit we will rent out, could we still claim capital works for the unit we will rent out given the year they were built?
– Would we ever be able to claim for plant and equipment even if we did a substantial renovation to the unit we rent out and bought everything new given we are technically living on the property as both units are on the one title?
– Re CGT on PPR: we bought the property in Oct 2021 and have been renting both units out. We will move into one early July 2022. Will GCT be worked out as a percentage of; the portion of the property we rent out (ie 50%) and the time that rented unit is rented out?
Really appreciate your help.
Cheers
ES.
Hi ES,
Thank you for your comment.
As the original building was constructed prior to 15 September 1987, there will not be any capital works allowance available in the original structure. If there have been renovations, extensions or additions carried out to the property by you or a prior owner since it was first built, there may be capital works deductions that you are eligible to claim.
Plant and equipment deductions are not available on second-hand properties purchased after 7:30pm on 9 May 2017.
However, if you renovate or install new plant and equipment assets there will be depreciation deductions available so long as those assets have not been previously used If you are living in one unit but renting out the other, the renovations on the other unit will still be claimable for depreciation purposes.
As the property was purchased for investment purposes, there will be CGT implications. To work out the capital gain, you could use both the proportion of the dwelling used to produce income and the period for which it was used for this purpose. We recommend speaking with your Tax Adviser or Accountant to discuss any questions you have regarding CGT and your specific investment scenario.
Feel free to give us a call on 1300 728 726, and one of our specialists will be able to discuss and assess the depreciation potential in the property and provide an obligation free quote.
Thanks,
The BMT Team
Hi in 1998 I purchased a house to live in for approximately 150,000.
I lived in it until 2007 when I got married and moved in with my husband.
The house was rented out up until now and I would like to sell it for approximately 900,000.
My first question is will I have to pay capital gains tax on the difference between 150 and 900 or because I lived in it am I able to be exempt from capital gains tax ?
If I moved back into the house for a period of time now what is it period that I would need to live in it as my main residence to be exempt from capital gains tax please . Kindest regards Suzanne
Hi Suzanne,
Thanks for your comment.
As the property has been income producing for greater than 6 consecutive years, there will likely be a CGT implications. You may be eligible for a partial CGT exemption.
We recommend speaking with your tax adviser or accountant to discuss any questions you have regarding CGT and your specific investment scenario.
Thanks,
The BMT Team
Hi,
Thank you for the article, I have a quick question for you..
We are building an investment property near our current PPOR. We are planning to sell our PPOR as we are building a new house in a different area. What would be the effect on the depreciation/CGT if we were to sell our current PPOR early and move into the brand new investment property for 6 months while we wait for our new house to be finished? Are we better off waiting to sell? Just concerned about it sitting on the market empty if it doesn’t sell straight away once we move to the new PPOR.
Thank you!
Hi Mel,
Thanks for your comment.
The main impact living in an investment property before renting it out occurs to the plant and equipment assets.
Firstly, any plant and equipment assets (e.g. kitchen appliances, window coverings) will become ineligible for depreciation deductions. This is due to 2017 legislation changes that don’t allow ‘previously-used’ plant and equipment assets to be depreciated.
However, you will still be able to claim depreciation on all eligible capital works. This is the structure of the property and fixed assets, which normally make up 85 to 90 per cent of depreciation claims.
Thanks,
The BMT Team
Hello
thanks for a great article
If I move into my investment property (rented for 10 years) to be my main resident. how long should I live there before I sell to avoid CGT?
thanks for your insights.
Hi Mahdy,
Thanks for your comment.
There is no set time frame for how long you need to live in a house until it is classed as a main residence. Your accountant will look at several factors when considering if a main residence exemption can be applied fully or partially to CGT upon sale.
Thanks,
The BMT Team