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Turn A Home Into An Investment

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.