A common question about owning investment property is whether an owner can live in their property or not. The answer is yes, you can live in any property that you own. However, it is important to realise that once you move into your property, it becomes your Principle Place of Residence (PPOR).
Basically, this means the property is no longer an investment property in the eyes of the tax office. An investment property is a property that you own which you rent out to other people. If it is used by yourself or your family, it is now just a regular home.
Can I Claim Tax Deductions?
This means you cannot offset expenses since you are not generating any income from the property. You may previously have been able to deduct these types of expenses:
- Mortgage Interest
- Council Rates
- Strata / Body Corporate Fees
- Maintenances Costs
- Property Management Fees
Along with these ongoing expenses, you can no longer claim depreciation on the building or fixtures/fittings/furniture which you may previously have been able to do so.
Capital Gains Tax?
Your PPOR, the property where you live, is normally exempt from capital gains tax. This is so you can buy and sell your main residence without being disadvantaged by paying a tax bill each time (assuming the value of your home is going up).
However, if you move out of your home and then decide to rent it out instead of selling it, it now becomes an investment property.
At this point, it is a very good idea to get your property valued by an independant valuer (eg. Herron Todd White) because if you ever sell this property in the future, your accountant is going to have to work out how much capital gains tax is payable. The period you lived in the property is exempt from taxation but at the time you turned it into an investment, it qualifies for CGT.
Let’s say you bought a property to live in for $500,000 and then you moved out 4 years later and it was worth $600,000. You then started renting it out and sold it 6 years later for $1,000,000. The tax office would see you as having made an investment gain of $400,000 of which 50% would be taxable under current Australian law.
Depending on your gross income, your tax bill could be as much as $60 to $80,000.
The 6 Year Rule
There is an exception to the above example and that is you can turn your home into an investment property if you move away to rent (normally for purposes of employment). You can remain exempt from capital gains tax for up to 6 years whilst your PPOR is being rented out.
I have personally used this exemption to avoid paying capital gains tax on my first property which I made a $100,000 gain on.
But as soon as you decide to buy another property to move into, that then becomes your PPOR and your other property then falls under the normal investment property rules.
Scamming the Tax Office
I have heard of people who want to buy an investment property, but live in it for themselves, so that they can claim all of the tax deductions that are entitled to an investor.
They would then get their mail delivered elsewhere (for example, a family members house) and if queried by the tax office, they could “prove” that they were not living in the investment property.
Let me tell you that whilst this might seem like a harmless rort that can be gotten away with, if you get caught, it will be treated as taxation fraud.
If you happen to get away with doing this for a long time, and then get caught, it could even be much worse as the amount of money being defrauded will have grown quite high over a long period. The best case scenario is that you have to repay every cent with interest, but the worst case sceanrio could see charges being laid and possibly even jail time.
So whilst you can live in your property that was previously an investment, and vice versa, it’s helpful to stay on top of the rules of what you can and cannot do. It’s always tempting to save on tax, but if you get it wrong the penalities can be quite high.