Can I Move Into My Rental Property to Avoid Capital Gains Tax?

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John

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As a property investor in Australia, you may have found yourself wondering, “Can I move into my rental property to avoid capital gains tax?” It’s a common question, and the answer is not always straightforward. In this article, we’ll dive into the world of capital gains tax (CGT) and explore how moving into your rental property can impact your tax obligations, including the beneficial impact on capital gains tax liability.

Understanding Capital Gains Tax (CGT)

A living room with furniture that is an investment property for someone

Before we delve into the specifics of moving into your rental property, let’s take a moment to understand what capital gains tax is and when it applies.

CGT is a tax on the profit you make when you sell an asset, such as an investment property. The capital gain is the difference between the property’s sale price and its original purchase price, minus any eligible deductions and expenses.

In Australia, with reference to the ATO, CGT applies to any property acquired on or after 20 September 1985. If you make a profit from selling your investment property, you’ll need to include the capital gain in your taxable income for that financial year. When a rental property becomes your primary residence, you may be eligible for a CGT exemption, but it’s important to seek expert advice to navigate the complexities of property tax and regulations.

CGT Exemptions and Discounts

Fortunately, there are some exemptions and discounts available that can help reduce your CGT liability:

  • Main residence exemption: If the property is your primary place of residence (PPOR), you may be exempt from paying CGT when you sell it.

  • Six-year absence rule: If you move out of your PPOR and rent it out, you can still claim the main residence exemption for up to six years, provided you don’t treat any other property as your PPOR during that time.

  • 50% CGT discount: If you’ve owned the investment property for more than 12 months before selling it, you may be eligible for a 50% discount on your capital gain.

These exemptions and discounts can significantly reduce your CGT liability, so it’s essential to understand how they work and whether you qualify. By turning your investment property into your primary place of residence, you can further reduce your capital gains tax liability, although you will no longer be able to claim tax deductions on the rental property.

Moving Into Your Rental Property

Now, let’s explore the reasons why you might consider moving into your rental property and the tax implications of doing so.

When you move into a rental property, it affects your ability to generate income from that property. This change impacts the ability to claim tax deductions, and you need to inform the tax authorities about the change in property usage.

Previously, the property was used to produce income, which has implications for financial matters such as loan assessments and capital gains tax exemptions. The calculation of capital gains tax will also be affected if the property was used both as an investment and as a primary residence.

Why Move Into a Rental Property?

There are several reasons why property investors might choose to move into their rental property:

  • To save money on rent or mortgage payments

  • To take advantage of the main residence exemption and potentially avoid CGT

  • To enjoy the benefits of living in a property they own

  • To prepare the property for sale by making improvements while living there

  • Moving into a rental property means you can no longer claim tax deductible expenses related to the property

Converting a Rental Property Into a Primary Residence

If you decide to move into your rental property, you’ll need to follow a few steps to convert it into your primary residence:

  1. Notify your property manager or tenants of your intention to move in, and provide appropriate notice as per the lease agreement.

  2. Update your address details with relevant organisations, such as your employer, bank, and utility providers.

  3. Inform your home insurance provider of the change in occupancy.

  4. Notify the Australian Taxation Office (ATO) that the property is now your PPOR. This is crucial for understanding the impact on tax deductions declaring, as it may affect your eligibility to claim certain expenses. Consider seeking advice from financial advisors, accountants, or quantity surveyors to ensure you correctly claim the proportion of expenses related to tax deductions.

Once you’ve completed these steps, your rental property will be considered your primary residence for tax purposes.

Tax Implications of Moving Into a Rental Property

When you move into your rental property, there are several tax implications to consider:

  • You’ll no longer be able to claim tax deductions for expenses related to the property, such as interest on the loan, council rates, and property management fees. Additionally, moving into the property affects your ability to claim tax deductible expenses.

  • If you’ve been claiming depreciation on the property, you’ll need to stop doing so from the date you move in.

  • You may become eligible for the main residence exemption, which can help you avoid paying CGT when you sell the property in the future.

It’s important to keep accurate records of when you moved into the property and any expenses incurred during the transition to ensure you’re meeting your tax obligations. Moving into the property also impacts your capital gains tax liability, as the main residence exemption can significantly reduce or eliminate the CGT payable upon sale.

CGT Exemptions When Moving Into a Rental Property

One of the main reasons property investors consider moving into their rental property is to take advantage of the main residence exemption and potentially avoid paying CGT when they sell the property. This exemption can significantly reduce your capital gains tax liability.

Main Residence Exemption (PPOR Exemption)

As mentioned earlier, if a property is your primary place of residence (PPOR), you may be exempt from paying CGT when you sell it. This exemption applies to the period that you live in the property and treat it as your main residence. However, while the main residence exemption can help avoid CGT, it also means you can no longer claim tax deductible expenses for the property.

To be eligible for the main residence exemption, you must meet certain criteria:

  • The property must be residential (not commercial).

  • You, your spouse, or your children must have lived in the property.

  • The property must not have been used to produce assessable income while you lived there (exceptions apply for home businesses and renting out a room).

If you meet these criteria, you can claim the main residence exemption for the period that you lived in the rental property as your PPOR.

The Six-Year Absence Rule

The six-year absence rule is a valuable extension of the main residence exemption. It allows you to continue treating your rental property as your PPOR for up to six years after you move out, provided you don’t claim any other property as your PPOR during that time. Declaring the property as your PPOR under the six-year absence rule affects your eligibility for tax deductions declaring, so it is advisable to seek advice from financial advisors, accountants, or quantity surveyors to understand and correctly claim the proportion of expenses related to tax deductions.

Here’s an example to illustrate how the six-year rule works:

  • You buy a property in 2010 and live in it as your PPOR for three years.

  • In 2013, you move out and rent the property to tenants.

  • You don’t treat any other property as your PPOR during this time.

  • In 2019, you sell the property.

Under the six-year absence rule, you can claim the main residence exemption for the entire period of ownership (2010-2019), even though you only lived in the property for three years.

This rule can be particularly beneficial if you’re planning to move back into your rental property in the future, as it allows you to continue treating it as your PPOR while renting it out in the meantime.

Partial CGT Exemptions

In some cases, you may only be eligible for a partial CGT exemption when you sell your rental property. This can happen if you’ve used the property for both investment and main residence purposes during your ownership period.

A partial CGT exemption can reduce your overall capital gains tax liability, making it a beneficial consideration for property owners.

Apportionment of CGT

When a property is used for both investment and main residence purposes, you’ll need to apportion the capital gain between the exempt and taxable periods. Apportioning CGT also affects the apportionment of tax deductible expenses.

Here’s how it works:

  1. Calculate the total capital gain (sale price minus purchase price and eligible deductions).

  2. Determine the exempt period (the time you lived in the property as your PPOR).

  3. Determine the taxable period (the time the property was used for investment purposes).

  4. Apportion the capital gain based on the ratio of exempt days to total days of ownership.

For example, let’s say you owned a rental property for 10 years (3,650 days) and lived in it as your PPOR for 2 years (730 days). If you made a total capital gain of $200,000, you would calculate the exempt portion as follows:

(730 exempt days / 3,650 total days) x $200,000 = $40,000 exempt capital gain

The remaining $160,000 would be subject to CGT.

It’s important to note that this is a simplified example, and there may be other factors to consider when calculating your CGT liability, such as the 50% CGT discount and any capital losses you have.

Considerations Before Moving Into a Rental Property

Before making the decision to move into your rental property, there are several factors to consider: Moving into the property can affect your ability to generate income, as it may change the tax deductions you can claim and require you to inform the tax authorities.

Potential Impact on Rental Income and Expenses

  • Moving into your rental property means you’ll no longer receive rental income from tenants.

  • You’ll also no longer be able to claim tax deductions for expenses related to the property, such as interest on the loan, council rates, and property management fees. Additionally, moving into the property means you can no longer claim tax-deductible expenses.

Changes in Tax Deductions

If you’ve been claiming depreciation on the property, you’ll need to stop doing so from the date you move in. Declaring the property as your PPOR affects your eligibility for tax deductions declaring, so it’s important to understand the implications. You may be able to claim a portion of the mortgage interest as a tax deduction if you continue to use part of the property for income-producing purposes (e.g., a home office or renting out a room).

Timing of the Move

The timing of your move can impact your CGT liability. If you move into your rental property and treat it as your PPOR before selling it, you may be eligible for a full or partial main residence exemption. Additionally, the timing of your move can significantly affect your capital gains tax liability, as informing the Australian Tax Office (ATO) about the change can help you save costs. However, if you sell the property shortly after moving in, you may not meet the requirements for the main residence exemption.

It’s crucial to weigh up these factors and consider how they align with your overall investment strategy before making a decision.

A house balancing on coins representing the price of a house and a mortgage

Seeking Professional Advice

Navigating the complex world of property taxes can be challenging, especially when it comes to capital gains tax and the main residence exemption. That’s why it’s essential to seek professional advice from a qualified tax professional or accountant.

A tax expert can help you:

  • Understand your CGT obligations when moving into a rental property

  • Determine your eligibility for the main residence exemption and other CGT discounts

  • Calculate your CGT liability based on your specific circumstances

  • Develop a tax-effective strategy for managing your investment property portfolio

  • Understand the impact on tax-deductible expenses when turning a rental property into your main residence or renting out a portion of the property

  • Get assistance with tax deductions declaring to ensure you correctly claim the proportion of expenses related to your investment property

By working with a professional, you can ensure that you’re making informed decisions and minimising your tax liability within the bounds of the law.

Key Takeaways

  • Capital gains tax (CGT) applies to the profit you make when selling an investment property in Australia.

  • Moving into your rental property can impact your eligibility for the main residence exemption and other CGT discounts.

  • The main residence exemption can help you avoid paying CGT on the period you live in the property as your primary place of residence (PPOR).

  • The six-year absence rule allows you to continue treating your rental property as your PPOR for up to six years after moving out, provided you don’t claim any other property as your PPOR during that time.

  • If you use a property for both investment and main residence purposes, you may be eligible for a partial CGT exemption based on the ratio of exempt days.

  • Moving into your rental property can reduce your capital gains tax liability by qualifying for the main residence exemption, but you will no longer be able to claim tax deductions on the rental property.

  • When you move into a rental property, tax deductible expenses related to rental income will no longer be applicable, and you must apportion expenses if you rent out a portion of the property.

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