Tax Consequences When Your Rental Property Becomes Your Primary Residence

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Ever thought about turning your investment house into your home? This decision has significant tax implications that need careful consideration, especially regarding tax deductions when renting out a portion of the property and the potential impact on deductions and capital gains tax when converting the investment property to a primary residence. This can help with cash flow and change how you rent out homes. But, it also changes your taxes big time. Switching from an investment to a home means you’ll have different tax rules to follow.

Sadly, you can’t get property depreciation breaks if you move in. But, you might not need to pay extra taxes if you sell your home later. Figuring out these tax changes is tricky. But knowing the rules is super important for smart property choices.

We’re going to explain the tax side of making your investment house a home. This info will help you get the most out of your taxes and real estate.

Key Takeaways

  • Converting your investment property to your primary residence will impact your tax obligations and entitlements.

  • When your rental property becomes your main residence, you can no longer claim property depreciation deductions.

  • You may be eligible for a Capital Gains Tax (CGT) exemption for the period you live in your former investment property.

  • Understanding the tax consequences is crucial for making informed decisions about your property portfolio.

  • Seeking professional advice from a tax agent can help you navigate the complexities of property tax and optimise your tax strategy.

Declaring Your Rental Property as Your Principal Place of Residence (PPOR)

When you decide to make your rental property your main home, tell the Australian Tax Office (ATO). This step can help you not to pay capital gains tax on the property sale later. It’s vital to know the ATO’s rules on what is a PPOR and why declaring it is key for tax purposes, including the implications for tax deductions and potential exemptions.

What Constitutes a PPOR According to the Australian Tax Office (ATO)?

You need to show the ATO that you truly live in the rental property. Here’s how:

  • Change your address on the electoral roll to the property’s address.

  • Update your driver’s license to show the new address.

  • Keep your things in the property.

  • Use the property’s address for mail.

  • In your name, connect all utilities at the property.

Doing these things will prove to the ATO that this property is your main home.

The Importance of Declaring Your Investment Property as Your PPOR

Declaring your property as a PPOR is important because it affects tax deductions and capital gains tax. After you move in, you can’t get tax deductions for things like mortgage interest anymore. Nor can you claim council rates or management fees.

However, being a PPOR might get you an exemption from paying capital gains tax when you sell. This could save you a lot of money and ease the sale’s financial impact.

Remember, to dodge the capital gains tax fair and square, you must really live at the property. The ATO is very clear on this, and breaking the rules can lead to big fines.

In short, declaring your rental as a PPOR is a key move when it becomes your main home. Knowing what the ATO sees as a PPOR and the benefits of making it official will help you play by the tax rules. Plus, it might reduce how much tax you pay when you sell your property later on.

Changes in Tax Deductions When Your Rental Property Becomes Your Main Residence

Changing your rental property to your main home comes with tax changes you must know. As a property investor, you’ve used tax deductions to lower your income taxes. But, if your rental becomes your main home, the tax deduction rules change. Additionally, this transition affects the calculation of assessable income for tax purposes, particularly in how rental or business use of a home influences entitlement to a full main residence exemption from CGT.

Tax-Deductible Expenses for Investment Properties

You can deduct many costs when the property is for rent. These include mortgage interest and property repairs. Basically, many expenses can lessen what you owe in taxes.

  • Mortgage interest

  • Property management fees

  • Repairs and maintenance costs

  • Depreciation of assets

  • Council rates and water charges

  • Insurance premiums

  • Advertising for tenants

This makes owning an investment property more appealing financially.

Non-Deductible Expenses for Your PPOR

However, when it’s your main house, you can’t usually count these expenses for tax breaks. Since you live there, the tax office stops these deductions.

Expenses you can’t deduct anymore as your PPOR include:

Expense Category Deductible for Investment Property Deductible for PPOR Mortgage interest Yes No Council rates and water charges Yes No Repairs and maintenance Yes No Property depreciation Yes No Insurance premiums Yes No

Yet, living in your former rental may allow you a capital gains tax (CGT) exemption.

Knowing about these deduction changes is vital. It helps you make smart choices about your properties and tax savings.

Capital Gains Tax (CGT) Exemptions for Your PPOR

Are you a property investor? You might have to pay CGT when you sell your property. But, if you live in your rental property as your main home, you could avoid CGT. The ATO knows most people don’t rent out their main home, so they offer this special rule. Additionally, making your investment property your primary residence can significantly reduce your capital gains tax liability when you decide to sell, as the property will no longer be subject to the same tax implications as a rental property.

Circumstances for Avoiding CGT

Once you live in your rental, you may get a full CGT main residence exemption. This means when you sell, you might not pay any tax on the money you make. To qualify, you should live in the property, keep your stuff there, and use it for your official needs. Meeting these ATO rules is key to this exemption.

The CGT Property Six-Year Rule

The ATO also has the CGT property six-year rule. It lets you treat your rental like your main home for up to six years while you rent it. But you must have lived in it as your main home before you rented it, and not have another main residence during this time.

This rule can help if you move away but plan to come back. You won’t have to pay CGT on your property’s gains during those six years.

Make sure you keep good records and get advice from a tax expert. Using these tax rules can help lower your CGT and increase your property’s profit.

Renting Out a Portion of Your PPOR

If your rental property now your main home, you might still want some extra income. Renting out part of your home is a way to generate income and get tax deductions for part of your expenses. But, it’s important to know how to divide costs correctly.

The rented portion of the property continues to produce income, which has tax implications.

Claiming a Percentage of Property Expenses

By renting out a room, you can deduct part of the expenses. This deduction is based on how much space the tenant uses. You can claim for costs like mortgage interest and repairs.

  • Mortgage interest

  • Council rates

  • Insurance

  • Repairs and maintenance

  • Depreciation of furniture and fittings

Apportioning Rental Expenses Based on Floor Space

The ATO recommends using the rented floor space to calculate these costs. Including areas the tenant shares is important. This makes sure expenses are fairly split between rental and personal use areas.

For example, in a 200 square meter home, if the tenant uses 20 square meters plus 10 square meters of shared space, your claimable percentage is:

(20 sqm + 10 sqm) ÷ 200 sqm = 0.15 or 15%

You could then claim 15% of the expenses for tax deductions.

Domestic Arrangements and Tax-Deductible Expenses

Letting a family member stay rent-free doesn’t give you tax deductions. The ATO only allows deductions for actually rented areas.

Keeping detailed records of rental income and expenses is very important. This will help a lot when claiming deductions on your taxes.

If you’re not sure about tax rules for renting out a room, talk to a tax professional. They can guide you through the tax process. This makes sure you get all the deductions you can, while following the ATO’s rules.

Example: Apportioning Expenses When Renting Out a Part of Your PPOR

When you rent out a part of your home, getting the costs right is key for taxes. Let’s look at how to figure out these costs, using an example. This is when you rent a room or part of your home.

Let’s say Kyle had a rental house but then moved back in May 2020. After renting out for four years, he converted it. Kyle rented out the granny flat, which is one-fourth of his place, to make some extra cash.

Kyle charged Brendon $125.00 each week for four months to stay in the granny flat. The property’s yearly upkeep was $12,000. Kyle needs to figure out which part of the expenses he can claim for tax. He does this by looking at the granny flat’s size and how long it was rented.

Total Annual Property Expenses $12,000 Granny Flat Floor Space 1/4 of total property area Rental Duration 4 months Apportioned Expenses (Granny Flat) $12,000 × 1/4 = $3,000 Claimable Expenses (Rental Period) $3,000 × 4/12 = $1,000

After doing the math, Kyle sees he can claim $1,000 as a tax deduction. This amount is one-third of the granny flat’s expenses during the rent.

This example teaches us how important it is to be careful with rental costs for tax reasons. Keeping good records and working out costs correctly can help you follow tax rules and get more deductions.

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

Thinking about turning your rental into your main home? You must look at the tax benefits and issues closely. By living in your rental, you might avoid capital gains tax. This means you won’t pay extra when you sell it later. But, remember, you can’t claim rental property tax deductions anymore once you move in.

If you make your rental your home, the CGT exemption rules just cover the time you live there. Moving in could help cut or remove what you owe in CGT. Many investors use this method to lower their tax bill.

But, if you rent out part of your place, you need to decide how much of the gain is from that part. The CGT exemption is only for the area you use as your home. Doing this lets you make some extra money from renting part of your home while still avoiding some CGT.

To plan the best tax moves, talk to a tax expert first. They can check your situation and offer advice on dealing with CGT for your rental property.

Here’s what to remember when thinking about living in your rental to curb CGT:

  • The CGT exemption only works while it’s your main home.

  • Once you move in, rental tax deductions go away.

  • If part is rented, CGT rules change. You have to figure out the part to tax.

  • Getting good tax advice is key to play by the rules and cut your CGT smartly.

If you really think about moving in, understand the effects on your taxes. This way, you can decide wisely to meet your money goals and cut your CGT bill.

Property Depreciation Deductions for Your PPOR

When you turn your rental property into your main home, there are important things to know about your tax deductions. If your rental becomes your home, you can’t claim any more depreciation deductions. This is because it’s not an income source anymore.

If you live in part of your rental while still renting some out, you could get some tax benefits. You can claim a portion of the depreciation as a tax deduction. This part depends on what space is rented out for income.

Engaging a Quantity Surveyor for a Depreciation Schedule

It’s smart to hire a qualified person to check your property for tax depreciation. This person, usually a quantity surveyor, will look at everything that can be depreciated. That includes the building itself, its parts, and equipment.

A depreciation schedule shows how much you can claim each year on your taxes. It shows the age of items and what part of your property makes you money. This schedule is key for your accountant when doing your tax filing. It helps decide how much of your property’s depreciation you can deduct.

Scenario Depreciation Deductions Rental property becomes PPOR (100%) No depreciation deductions claimable Rental property becomes PPOR, but a portion is still rented out Depreciation deductions apportioned based on the area used for rental income

Working with a tax pro is very important for getting your property deductions right. They help make sure you follow the ATO rules. They explain how to hire a surveyor and understand the tax changes when your rental turns into your home.

Key Takeaways: Tax Consequences of Your Rental Property Becoming Your Main Residence

Switching your investment home to your main residence has critical tax effects. By telling the Australian Tax Office (ATO) about it, you can avoid paying Capital Gains Tax (CGT). But, you won’t get any rental property tax deductions anymore.

If part of your home is rented out, you need to divide the tax by space used for rent. Also, split the costs by the area used for rent. This way, you can correctly deal with the tax when you change your rental home to your main one.

“Engaging an expert tax agent can help you navigate the complexities of property tax obligations and take advantage of available tax minimisation strategies when transitioning from a rental property to a primary residence.”

Here are some tips to get the most out of the tax benefits:

  • Inform the ATO when your property changes from a rental to your main dwelling

  • Know about the CGT exemption you get when you live in your home as your main one

  • Divide capital gains and expenses if part of your main home is rented

  • Get advice from a tax expert to understand the rules and better your tax situation

By tackling these tax issues early and getting professional help, you can move your rental into your main home smoothly. This approach can reduce your tax payments, allowing you to enjoy living in your former rental home.

Calculating Capital Gains Tax When Selling a Rental Property Turned PPOR

When you sell a rental property you’ve lived in as your main home, you need to know how CGT works. The ATO has rules on CGT for properties used for both living and renting. Knowing these rules helps you make smart choices and lower your tax bill.

Factors to Consider When Calculating CGT

There are several things to think about when calculating CGT. This is true when your investment property becomes your main home. The main factors include the purchase and sale prices, rental and main home periods, and any tax deductions or exemptions.

Now, let’s use an example to see how these factors affect CGT on a former rental.

Scenario Details Purchase Date 1 July 2005 Purchase Price $300,000 Rental Period 1 July 2005 – 30 June 2021 PPOR Period 1 July 2021 – 30 June 2022 Sale Date 30 June 2022 Sale Price $500,000

Troy and Mary bought a house to rent for $300,000 in July 2005. They rented it for years. Then, on July 1, 2021, they started living there. A year later, they sold it for $500,000.

Here’s how to figure out the CGT:

  1. First, find the capital gain: $500,000 – $300,000 = $200,000

  2. Then, work out the assessable amount by taking into account rental days: (5,844 rental days / 6,209 total days) x $200,000 = $188,241

  3. Next, apply the 50% discount: $188,241 x 50% = $94,120

In this case, Troy and Mary’s CGT is $94,120. This is after factoring in their time living there and the discount.

Remember, each case is different. You might have more factors to think about. A tax pro can guide you through this. They’ll make sure you follow the rules and get all the tax breaks you can.

Seeking Professional Advice from a Tax Agent

Investing in property has helped many Australians build wealth. But, understanding property tax rules can be tough without help. That’s why working with an experienced property tax specialist matters a lot. They can help you increase your profits and lower your taxes.

Our team at Property Tax Specialists is here to give you the best property tax advice. We want you to be informed when you make choices about your investments. Are you thinking of making your rental property your main home? Or, do you need help with Capital Gains Tax or figuring out what you can write off for taxes? Our experts are ready to help through all these decisions.

It’s hard to tackle property tax rules on your own. But, with the right property tax specialist by your side, you can manage your taxes well. They’ll help you stay up to date on any tax changes. This way, you can protect what you’ve invested in and get the most out of it. If you want advice that’s just for you, get in touch with one of our skilled property tax accountants today.

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