There are a number of reasons why Australian home owners might consider turning their primary place of residence into an investment property.

A baby boomer might do so because they plan on downsizing but are not yet ready to sell the family home, a generation Y property owner might choose to rent a property while they are travelling overseas for an extended period of time and a Generation Xer could have just been offered a job opportunity interstate that requires them to live away temporarily but they plan to return home afterward.

Whatever the reason for choosing to rent a property which was previously your place of residence, it’s important to be aware of the impact this will have on your individual tax situation.

Below are three factors for home owners to consider before deciding to rent their home:

Income becomes assessable and deductions can be claimed

Once a property becomes income producing, the owner will be required to submit details of any income they earn for assessment when completing their next annual income tax return.

Before renting any property, it is wise to speak with an accountant and a financial planner for advice to work out whether the decision is right for you financially and to discuss any tax implications this will have in the future.

A home owner will also become eligible to claim deductions for any of the associated expenses involved in renting the property. Examples of expenses which can be claimed include interest on your home loan, council rates, property management fees and depreciation deductions.

It is important to note that payments from a family member for board or lodging are not considered rental income, so in these situations you can’t claim income tax deductions.

Seek advice to ensure deductions are claimed correctly

When a rental property has previously been a home it is more likely that the Australian Taxation Office will pay further scrutiny on the deductions claimed. There are a couple of reasons for this:

  • deductions can only be claimed for the period in which the property is income producing
  • home owners often complete repairs and maintenance or capital works to ensure tenancy and this can be a grey area depending on when the work was completed as to whether the owner is able to claim

An accountant will be able to provide advice on deductions relating to expenses for repairs and maintenance.

To ensure depreciation deductions are maximised and claimed correctly, speak with a specialist quantity surveyor to arrange a comprehensive tax depreciation schedule. This will outline all the items which can be claimed for the wear and tear of the building structure and the plant and equipment items contained within the property. A quantity surveyor can pro-rate the schedule for the period of the financial year that a primary place of residence has been income producing.

If you are planning any work that will improve the condition or the quality of the building or the assets beyond its original condition once the property is income producing, ask a quantity surveyor how this will affect depreciation deductions prior to starting any work.

Be aware of Capital Gains Tax implications and rules

Your primary place of residence is exempt from Capital Gains Tax (CGT) provided it is owned by someone who resides in or occupies the dwelling primarily as residential accommodation and the property is located on land under two hectares in size. However, deciding to rent your primary place of residence could impact what CGT will apply if you later decide to sell the property.

There are a range of exemptions available, particularly for those who only rent their home temporarily including:

  • the six-month rule, which allows owners to hold two primary places of residence if a new home is purchased before a purchaser disposes of an old one. In this scenario, both dwellings will be treated as a primary place of residence for up to six months so long as the old property was the owner’s primary place of residence for at least three months in the 12 months before it is sold, the owner did not use the old property to provide an assessable income in any part of the 12 months when it was not the primary place of residence, and provided the new property becomes the owner’s primary place of residence.
  • the six-year rule, which provides a CGT exemption for up to six years after a home owner vacates their primary place of residence and rents it out. There is currently no limit to the number of times a property owner can reset the exemption rule so long as each absence from the property is less than six years. Under this rule, you cannot treat any additional dwelling you own as your main residence for that period.
  • the 50 per cent discount, which is available for property investors who hold an income producing property more than twelve months from the signing date of contract before selling a property.

You should consult with an accountant to discuss how renting a property and claiming depreciation deductions can impact CGT.