TAX IMPLICATIONS OF CONVERTING AN INVESTMENT PROPERTY INTO OWNER OCCUPIED

If you decide to move into an investment property you owned, it is recommended that you get a valuation done because it sets the cost base to work out capital gains tax if you decide to sell it in the future.

Before we delve into CGT you need to be aware that you won’t be able to claim bank interest, depreciation, negative gearing and other property related expenses. This can then affect your overall  borrowing capacity. You also can’t claim rental income as your income and bank assesses your mortgage repayments at a higher rate (anywhere from 7% to 8%) even though you are paying around 4%. If you are an investor & renting then your rent payment is calculated at the actual payment to work out the borrowing capacity.

When considering CGT, you could be in one of the following two situations:

Situation 1 – If the property was always an investment property:

The liability for Capital Gains on sale of the property will be pro-rated between the time it was an investment property and the time it is your principal place of residence.  For e.g. if you rented the property out for 6 years and lived in the property for 4 years before selling, you would be liable to pay CGT on 60% of the gain; 6 out of 10 years.

Situation 2 – If you lived in the property when you first bought it and later rented it out:

If you had lived in the property for at least 3 months then moved out and subsequently rented the property for no more than 6 years and then moved back in, you could elect to treat the property as your main residence for the entire period and pay no CGT.  It also depends on what you were doing for those 6 years.  If you were renting elsewhere, or living overseas, you can use this exemption.  If you had another principal place of residence during this time then that property would be up for CGT.

Note: Capital Gains tax (CGT) is payable in Australia on all investment assets purchased on or after 20 September 1985

From a loan structuring point of view make sure it’s setup correctly to get the maximum tax benefits. Please feel free to call on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au

Please note this is only a general information and it is recommended to seek advice from an experienced property & tax accountant.

*Please note – Think & Grow Finance does not provide tax advice and the article above is general information only. Readers should always assess their situation accordingly and seek tax advice with a qualified taxation adviser.