You may be looking to upgrade your home, or perhaps downsize to a smaller one and wish to retain your original property as an investment property.
So what are the tax issues you need to consider?
- Capital Gains Tax, the Main Residence Exemption and the 6 year rule
- Taxable income and tax deductions
- Depreciation, capital works and the 1 July 2017 change to prevent depreciation deductions on previously used residential investment properties
Let us look at each in turn.
Capital Gains Tax (CGT) and the Main Residence Exemption
Any capital gain or loss from disposing or selling your main residence is exempt from CGT. You can only have one main residence.
If you rent out your old main residence you will need to calculate CGT on the part of the ownership period that relates to it being an investment property. This is different depending on whether you lived in it first or not.
If you first used it as an investment property and later lived in it, you apportion the capital gain based on time.
However, if you lived in the property first and only later used it as an investment property you will need to establish the market value of the property at the date you rented it out. Any capital gain is only paid on the gain you make from that value less any costs.
If you are a non-resident when you sell your property, you don’t get the main residence exemption.
Usually, you have to live in a property to claim the main residence exemption and have any capital gain disregarded for tax.
There is a 6-year absence rule that allows you to keep on treating a property as your main residence even after you have moved out. The rule extends beyond 6 years and is indefinite if you don’t rent it out. There was a new vacant land holding cost change introduced on 1 July 2019 which would make not renting out the property a very expensive exercise but that is a story for another time.
Just remember though that you can only have one main residence – so if you buy another property to live in you might not end up using the 6-year rule. Then again, you have up to 6 years to decide which one to choose!
If you go over 6 years the rule doesn’t apply at all, that is, you don’t get to treat 6 years of the rental period as tax-free.
Taxable income and tax deductions
Any rent is now taxable to the property owners. You can however claim many expenses as tax deductions. They include interest on any loans used to buy the property; advertising for tenants, repairs and maintenance (but only after the property is advertised for rent or tenanted); body corporate fees; rates and land tax; managing agent fees; insurance. Some deductions need to be spread over time, such as borrowing costs, depreciating assets (see below for limitations); and cost of the building (capital works).
You cannot claim repairs made before the property was available for rent (but you might be able to claim them as depreciation over time) or costs to buy or sell the property (may form part of the costs for any capital gain).
Depreciation and capital works
It is usually a good idea to get a depreciation report. This is done by a quantity surveyor and will outline for you the tax deductions you can claim for depreciation and capital works (the cost of the building).
An investor can claim depreciation deductions under two categories. The first category is capital works deductions, which refers to the structure. The second is depreciation on plant and equipment, which refers to the easily removable fixtures and fittings.
From 1 July 2019, you won’t be able to claim plant and equipment deductions for previously used assets. If you replace any old items with new ones then you can claim depreciation for those.
It is important to get some advice on how to maximise your financial investment in any property you intend on buying, retaining or selling. Each circumstance can be different and there may be other factors that result in a different outcome. The best thing to do is get good advice to ensure you are maximising your tax deductions and not causing yourself a future tax problem.