Turn your main residence into an investment property

If you're considering upgrading your current home or downsizing, retaining your original property as an investment can be a strategic financial move. However, before you embark on this journey, it's crucial to understand the tax implications. 

Here’s a comprehensive guide to ensure you're well-prepared. 

Capital Gains Tax & main residence exemption. 

Typically, any profit or loss from selling your main residence is exempt from CGT. However, if you convert your property into a rental, the exemption rules change. Here's what you need to keep in mind: 

• Initial investment property: If your property was first used as an investment and later became your main residence, you'll need to apportion any capital gains based on the time the property was used for each purpose. 
• Main residence first: If you first lived in the property and then rented it out, the CGT calculation will involve determining the property's market value at the time you started renting it. You only pay CGT on the gains from that point onward. 
• Non-residents: If you’re a non-resident when selling your property, you don't qualify for the main residence exemption. This is crucial for expatriates and those living abroad who maintain properties back home. 

Six-Year Rule 

Under the Six-Year Rule, you can treat your property as your main residence even after moving out. This allows you to keep the main residence exemption for up to six years if the property is rented. After six years, any gains during the rental period become fully taxable. However, you can only have one main residence at a time; if you buy another property to live in, you might lose your six-year exemption.

Here are two important considerations: 

• If you purchase a new residence, you might forfeit the exemption for the old property if it's rented. 
• If the property remains vacant (and you don’t own another residence), the exemption period is indefinite. However, recent changes in vacant land costs may make leaving the property empty a costly choice. 

Taxable income & deductions 

Rental income is fully taxable, but you can offset it with a variety of deductions. These include immediate deductions and spread deductions. 

• Immediate deductions: Interest on property loans, advertising costs for tenants, repairs and maintenance (after the property is rented), rates and taxes, body corporate fees, managing agent fees, and insurance premiums. 
• Spread deductions: Borrowing costs, depreciating assets, and capital works (building costs) are spread over time. 

Note that repairs and improvements made before renting the property are not immediately deductible. They might qualify as depreciation, or they could form part of the capital costs, reducing the overall taxable capital gains later on. 

Depreciation, capital works, and the 2017 depreciation deduction change. 

Depreciation and capital works deductions offer substantial benefits. A qualified quantity surveyor can prepare a detailed depreciation report to outline the deductions available. 

However, there have been changes in depreciation rules for previously used residential properties. As of July 1, 2017, Investors can no longer claim depreciation on second-hand assets (e.g., appliances or furniture) purchased with the property. Instead, these assets are factored into the overall capital gain or loss when selling the property. 

Important considerations before renting out your home 

Renting out your home involves a number of strategic, and even emotional, decisions. Here are a few key points to keep in mind. 

1. Market timing: Consider whether it's the right time to rent out your property based on the rental market and property values. Talking with a trusted real estate agent (Ascent Property Co) can provide powerful insights and peace of mind here. 
2. Property management: Decide if you'll manage the property yourself or hire a professional agent (Ascent Property Co). 
3. Legal compliance: Understand your obligations as a landlord under local tenancy laws. If you choose to hire a professional property manager, they’ll assist here. 
4. Insurance coverage: It vital to secure adequate insurance coverage that includes landlord-specific protections. 
5. Tax planning: Every investment property is unique, and strategic tax planning will ensure you're maximising deductions and minimising future liabilities. The level of equity in your old house also needs to be reviewed to determine whether it’s more tax effective to rent out or sell. 

Ready to turn your home into a lucrative investment? 

Retaining your original property as a rental requires expert advice. Every property is unique, and tailored tax planning can ensure you're maximising your investment. Contact us to understand your potential financial gains and minimise any risks involved, and reach out to Ascent Property Co for tailored guidance and support on selling or leasing your property.