What happens when you rent out your home?

While you live in your home you are generally free of any tax consequences. If you sell it you should get the principal place of residence capital gains exemption.

While you own it none of the expenses associated with owning the home are tax deductible. But once you decide to rent it out the situation changes.


Income tax implications

If you rent it out, the net rental income needs to be declared in your tax return just like for any other investment property.

You can claim running costs like rates and water as well as non cash costs such as depreciation. Please refer to our investment property deductions page for more information.

Where the property is jointly owned, the split of rental income has to match the ownership interest. You cannot split it all to one family member arbitrarily.

You can claim back interest on the loan that was used to originally buy the property. However, this isn’t always as simple as it first appears.

Continue to read on to find out why.


The home loan may not be entirely tax deductible

If you have a loan, you are limited to claiming interest on the loan value before any other drawings. That is, the balance of the loan that was originally used to buy the property.

For example, you bought the home with a $400,000 loan and paid back $100,000 of it over time. Then you redraw $50,000 to buy a new car. Although your loan is $350,000, you can only claim interest on the $300,000 that relates to the original purchase.

You can help get around this issue by using an investment loan offset account.


Capital gains tax implications

If you move out of your home and buy another home to live in, then the old home becomes a taxable asset. When you sell it you need to calculate the capital gain made on the sale, but this gain is reduced proportionately based on how long you used it as your home.

For example, you lived in the old home for 15 years and rented it out for 10 years. Your capital gain is reduced by 60% (15 years lived in / 25 years owned).

If you move out of your home and rent another home, then the old home becomes a taxable asset. When you sell it you need to calculate the capital gain made on the sale, but this gain can be reduced.

First, it is reduced proportionately based on how long you used it as your home. Second, you can choose to treat the property as your principal place of residence for up to 6 more years after moving out, provided you do not buy another home to live in.

For example, if you lived in the old home for 15 years and rented it out for 10 years. You choose to apply the extra 6 year exemption. Your capital gain is reduced by 84%: (15 years lived in + 6 year extra exemption) / 25 years owned.


Renting out part of your home

Do you own a two or three bedroom property? You can rent out your extra rooms to help pay your mortgage, however you need to speak to your accountant to confirm how this will affect your income tax and capital gains tax liabilities.

You will need to declare your rent income on your tax return and you can deduct expenses such as the interest on your investment loan, council rates and water rates. You can only deduct a proportion of the expenses depending on what percentage of the property is rented out.

Since, your principal place of residence is now producing an income this may mean that you will pay some capital gains tax when you sell the property.

Before you rent out your spare room, call your accountant and confirm exactly how the Australian Tax Office (ATO) will assess your situation. If the capital gains tax liability is too high then this may negate any benefit from the rent income that you receive!


Speak to an accountant

This information is general and has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors.

We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.

Need the help of a mortgage broker? Call us on 1300 889 743 or enquire online.

  • Dylan

    Hi, I own a 3-bedroom apartment in downtown Sydney. Now I reckon it is a big one for me, so I rented 2-bedroom to my friends so that it could be easier for mortgage repayments as well. Do I have to pay tax on that income as well?

  • Hi Dylan,

    Generally, when you rent out your property to others, even your residence, the net rental income needs to be declared in your tax return similar with other investment property. However, you can claim operational costs like water and rates.

  • Sam

    Hi,

    I have couple of questions.

    1. How long do I have to stay in the owner occupied hoone before converting it into an investment property ?

    2. Say, if i have taken a loan as owner occupied and paid 5% deposit, what would be the implications on my loan ?

    Thnaks,

    Sam

  • Hi Sam,

    1. That depends on who you’re asking. If you received the first home owners grant then a minimum of 6 months is required. If it’s for tax purposes then talk to an accountant. If you told your bank you bought a home and later you decide to move out and turn the property into an investment you should discuss with your broker. In most cases you are allowed to rent out the property if you have genuinely changed your mind. I don’t think the banks care too much what you do as long as you make your repayments.

    2. Likely none. However discuss with your broker.

    To be clear it isn’t advisable to lie to your bank in the loan application. This can be treated as being in default of the loan so can have serious consequences. It’s best to discuss with your broker what your plans are as it’s a grey area. Many people plan to buy a property as an investment and then move into it later when their income is higher and they can better afford the repayments. So banks do allow these people to genuinely change your mind.

  • Sam

    Thanks for quick reply.

    I am not eligible for First Home Buyer Grant as the house I am interested in is not newly built. So this purchase will be owner occupied without a government grant

  • Nicole Tissott

    Hi All

    I moved out of my PRIMARY residence 24/6/16 when I entered in to a Lease to live somewhere else. Is it from this date that I can treat it as an INVESTMENT property, or does my old primary residence need to be LEASED out before that for tax purposes?

    I was hoping to claim expenses incurred 30/6/16 preparing my old primary residence for a tenant. The tenant’s lease started 18/7/16

    Thanks :)

    Nicole

  • Hi Nicole,

    Sorry I’m not sure about this one. Best to check with an accountant as it’s a grey area.

  • Finneas

    At what rates can I get an investment loan that’s secured by a residential property at this time?

  • Hi Finneas,
    Please check out the investment loan rates page to find out the current investment loan rates on residentially secured investment loans as well as commercial secured ones. There are also additional info and rates on that page that you may find useful. Here’s the link to the page:
    https://www.homeloanexperts.com.au/investment-loans/investment-loan-rates/

  • Austin

    This is one of the options I have in mind, the other being a co-ownership investment loan. Can you tell me if the co-owner needs to be a blood relative or it can be someone else too?

  • Hey Austin,
    You can borrow with anyone you feel you could commit to a mortgage with, including siblings or other relatives, partners, friends, flatmates, work colleagues or two or more sets of couples (for a home, investment or even a holiday house).

  • El Aouadi

    I am french i just arrived in Perth and i would like to buy my principal residence . But I finded that the deduction of tax on my income is only possible on a rental investment. true or false ?
    I have to pay consequent taxes On my salary and from what i see it is not really interesting to invest in principal residence . I hope I am wrong can you please advise me ?

  • Yes that is correct you can only tax deduct an investment properties expenses such as interest and other costs.

  • Kim

    I purchase a property in Sept 2012 as a rental and moved into it Oct 2014 as my primary residence I had no other property (I had a valuation done on it at this time) I then sold it in April 2016. During this time I had many upgrades done to the property as it was now my primary residence and it had been run down during the rental period by tenants.
    I have been advised by my Tax consultant that I cannot use a valuation at the time I moved in I must use the sale price to assess capital gain. I am a bit confused by this because I was advised to gain the valuation when I moved back in so if we did do any improvements then the capital gains would only be on the value of the property at the time I moved into it not the time of sale.

  • Hi Kim,
    My understanding is that the valuation can be used in some circumstances. However I’m not a tax expert so you’d likely need to seek the advice of a second tax consultant to be sure.
    I do know that the purpose of the valuation matters. E.g. a mortgage purpose valuation is different to a tax purpose valuation. You can order a valuation for a property and ask the valuer to assess the value at some time in the past so it may be possible to order a new valuation if one is required.

  • Abeera Sivapalasingam

    I purchase my first home and given for tenents for 1 year.Next year I am hoping to move.
    When I sell the proerty what happen to capital gain tax?

  • Hi Abeera
    You would work out the value at the time of the change in use and can rely on this for CGT.
    It’s complex so best to get advice from an accountant.

  • Josh Ceddia

    If you initially rent for a year before moving in and occupy say a couple of years after, are you eligible to use the 6 year exemption to rent out?

  • Hi Josh,
    You’d need to contact an accountant about this. I understand the basic rules regarding tax but this specific example would be beyond my understanding.

  • Kiara

    I am a first home owner and looking at buying a property primarily as an owner occupier and my primary place of residence My plan was to purchase the property off the pla, rent it out for 1 year and then move in. This gives me access to first home buyers grant as well as an opportunity to save further for furniture ext. My question is at purchase am I allowed to have an owner occupier home loan if I plan on renting out first? or Must I take on a loan as an investor loan and then switch it over to owner occupier when I move in? Obviously I would prefer to have it as owner occupier from the get go so I can take advantage of the lower rates and simplify the process of attaining the first home buyers grant in Victoria but I am not sure if this is permitable by law.
    Thankyou
    Kiara

  • Hi Kiara
    You’ll need to disclose this clearly to the lender. It would be better to have the owner occupied first to get the grant, low rate, etc. Normally, the bank will allow you to change from investment to owner occupied or vice-versa in 6 months time. So we will need to assess what your objective is and what can suit you best. If we go with investment first then rental income and negative gearing comes into play. It depends on your needs but yes we need to diclose the fact to the lender.

  • andesch

    I am a first home owner and I am 3 years in to a 5 year fixed interest rate period. I’m moving away for work and wish to rent the house out to pay the mortgage while I rent elsewhere. The bank said I can rent out the house no problem but they won’t change the Owner occupier loan to an Investment loan whilst it’s in a fixed period, unless we wish to pay the $15k break fees. So, is it possible I can claim any deductions whilst renting the house out but still under the OO loan for the next 2 years? I’ve done a lot of reading and there’s a lot of people stating that as long as the intention was to occupy the home, which I’ve done for 3 years , then renting it out without changing the loan from OO to IP is no problem, and that the ATO wouldn’t be very strict if we’re claiming the deductions. If we can’t claim the mortgage interest as deductions, do we still have to list the rent as income?

  • Hi,
    This is something that you’ll need to get checked with your accountant or a tax expert. With banks, they will charge break cost to make any changes in fix period. If it’s beneficial to change it to investment , then paying the break fee may be the way to go. This actually can change daily and sometimes it can even be 0. You’ll need to check with the bank on daily figures for this. Also, it may be possible to change it to investment and not pay break costs but it will require a reassessment and rates will likely increase.

  • Richard Giles

    I am a first home owner in VIC and am occupying the property (I’m within the first 6 months if that matters). If I want to rent out one of my spare rooms is that allowed without losing my FHOGs grant?

  • Hi Richard,
    Yes that is ok. As long as it remains your primary residence for at least twelve months. Note that for other states you only have to live there for six months not twelve months.
    The specific rule for VIC is:
    “Intend to live in the home as their principal place of residence (PPR) for at least 12 continuous months, commencing within 12 months of settlement or completion of construction”

  • Chris

    I am interested in owning an investment property for seasonal holiday rentals, not permanent tenancy. What is the minimum number of days leased per year is it declared an investment property?

  • Hi Chris,
    You’d need to talk to an accountant or tax agent about that because I’m guessing that’s why you’re asking? The ATO has a page on this that may be helpful https://www.ato.gov.au/general/property/in-detail/holiday-homes/
    In terms of lending we can accept a holiday rental as security for a home loan. A lot of lenders have problems with this however as long as we assess the market rent in our proposal or you have a strong income from your job then we have some that can accept it.

  • Richard Giles

    Thankyou!

  • vee

    Can i still claim my house Colorado
    as a primary residence, if i never bought another house. i just rented in another state.

  • Tatooine

    Hi, where can I find the source for that information pls? Thank you

  • It’s best to call the hotline for your state government. If you google NSW first home owners grant hotline you’ll get the ph#. Just replace NSW with your state.

  • Tatooine

    Sorry, I meant the information about how long you have to keep the property as your primary residence before you can turn it into investment one (the last section you wrote there) thank you again

  • Hi Tatooine,
    It’s best to speak to an accountant about this. We recommend http://www.lucentor.com.au/

  • James

    Hi there. I have recently bought a property and successfully claimed FHOG. The property inherited a lease until later this year, which turns me into a temporary ‘Investor’. My intention is to move in once the lease is expired. Could I check with you that, given my intention is to move in within 12 months as OO, can I claim the interest on the mortgage until I move in?

  • Hi James,
    Yes that’s correct you can based on my understanding. However check with your accountant to be sure.
    Note that bank systems often automatically update your address to be the new home address so your tenant may get your mail. Best to check with the bank and tenant to avoid issues.

  • James

    Thanks for your sqwift reply.
    However, does it have CGT implication given it has been ‘forced’ to rent out before moving in?

  • Hi James,
    I believe this will not be a problem as long as it is the only property you own as you can sometimes nominate one property you own to be your principal place of residence even if you are not living there for a period of time.
    Again I’d recommend you speak to an accountant about this to be sure.

  • James

    Thank you