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 sold my principal place of resident in 2015, and bought another property with the intent to demolish and build, and live in the house. Approximately 2-3months after settlement, I leased out the new house as it was too small for my family to live in. I had no other residence at the time. I ended up renting a property. The whole process ended taking 2 years; so I leased the property for 2 years whilst I paid rent for two years.
Circumstances then changed, so I had to move into the small house that I was leasing. I ended up living in it for 2 years. During that 2 years period of time, I subdivided the block, and ended up building at the back. I have now moved into the new property at the back, and am leasing out the old at the front.
What options to I have to reduce or eliminate a CGT event?
Hi James
Thanks for your comment.
Once a property has been used to generate income, capital gains tax (CGT) will need to be calculated once the property has been sold. Properties owned for longer than twelve months are eligible for a 50 per cent discount on CGT.
There are partial exemptions available when a property was first your principal residence then used for generating income, which does in essence pro rata the time periods when calculating.
We recommend discussing this scenario with your accountant before making decisions.
We also recommend you get in touch with us to arrange a tax depreciation schedule on the income-producing property at the front of your block, if you don’t already have one.
Thanks,
The BMT Team.
I am selling a rental home & exchanging, pursuant to 1031, into another home. Under what conditions may I live in the exchange home, or do I need to be making improvements while living in it, Thank you.
Ken Arrick
Hi Ken,
Thanks for your comment.
A 1031 exchange is a capital gains tax (CGT) deferral system available in the United States, which does not exist in Australia.
Australia does have other CGT discounts and exemptions available such as primary place of residence exemption and fifty per cent discount if the property has been owned for longer than twelve months.
We recommend consulting an accountant as we are only qualified to provide advice on CGT as directly related to tax depreciation.
Thanks
The BMT Team
Hi,
If I buy investment property for $2m and rent it out for 2 yrs, at the end of 2 yrs the property has been valued at $2.2m. On the third year it gets knocked down and build new home with a value of $3.5m after completion which becomes my PPOR for the next following 10 yrs. After this 10 yr period of being my PPOR and I decide to sell it for $4.5m. Am I entitled to full/part CGT exemption?
If part, how is a partial exemption calculated?
Hi Lina,
Thanks for your comment.
As you bought the property as an investment, it will likely be looked at for capital gains tax purposes. Once you moved into it, you can use it as your main residence from that date.
As it was an investment when you purchased it, the original purchase price will be used to calculate your cost base. The knock down, rebuild expenses and other elements of cost can be added to the cost base when working out your CGT.
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
Dear Sir/Madam,
I loved info in your article.
I have a question I need help with,
A- I have investment property which I bought in oct 2015 to live in till I rented it out on oct 2018 when I bought my 2nd property to live in as my primary residence.
Hence, i have declared this property as investment property to ATO and have been claiming tax deductions from first property since oct 2018.
Now in want to know down that investment property in soon future and build a new house on that land to live in as my primary residence.
What are the possibilities and tax implications for me to do the above .
Appreciate your assistance,
Regards
Aminder
Hi Aminder,
Thanks for your comment.
As the property has been used to produce income, there could be CGT implications. It’s important to discuss your knock down rebuild circumstances with your tax adviser or accountant as they can provide financial advice regarding your specific investment scenario.
As the property has been an investment since October 2018, you will be able to claim depreciation deductions on eligible new plant and equipment assets and capital works since that date. If you have not been claiming depreciation, you will be able to amend your past returns up to 2 years to recoup missed deductions.
To organise a quote or for further information, please get in touch with one of our depreciation specialists on 1300 728 726.
Thanks,
The BMT Team
Hi BMT Team,
I’m currently renting while I search for my dream home (sold my home March 2021 and money invested in managed funds. These managed funds have done really well over the last year and I’ve estimated that my tax bill is going to be huge because of these gains in the investments (revenue and value increases last half of 2021). However current value of the funds have dramatically reduced to what they were in June 2021). So now have less money to buy a home and will also have to keep alot of it back o pay the big tax bill for 2021/22 period
Just wondering if I would be better off in terms of reducing my tax bill if I brought an investment property? (Was thinking of setting up a place in Tassy as an AirBnB.) Or would I be better off keeping the money in the managed funds until I find my forever home?
Any advice or direction greatly appreciated.
Many thanks, Ann
Hi Ann,
Thanks for your comment.
These variables will affect the performance of your investment and it is hard to say how that compares with the performance of other assets such as managed funds.
As we are only qualified to provide information on tax depreciation, we’d recommend asking your accountant or consulting with a financial advisor to discuss the right strategy for your financial circumstances and goals.
Thanks,
The BMT Team