Turning an investment property into your home

Say you have an investment property, but don’t live in it. Is it possible to turn that investment property into your home? The short answer is yes - but it requires some legwork.

Life happens and sometimes financial circumstances change. Perhaps your investment property is negatively geared with negative cash flow and to save money you are considering turning your investment property into your primary place of residence. Or, maybe you purchased a property as an investment a couple of years ago but couldn't afford to live in it yourself until now, when your financial position has changed.

No matter your circumstance, there are a number of implications to factor in before turning your investment property into your primary residence.

Can you live in your investment property?

When considering making the transition from investment property to primary residence, first and foremost you must inform the Australian Tax Office (ATO) that you’re no longer generating income from your investment property as it has become your primary residence. 

Your primary residence, also known as principal place of residence (PPOR), refers to the residence in which you permanently reside. This residence does not generate income for the owner and is also exempt from capital gains tax.

Turning your investment property into a primary residence has a beneficial impact on your capital gains tax liability, but unfortunately, you’ll no longer be allowed to claim tax deductions on your rental property.

Factoring in current tenants

Before you begin packing up your belongings in boxes, if there is already a tenant in place within your investment property, moving right away cannot take place.

Residential tenancy laws afford tenants various rights, including adequate notice that an owner is wishing to return to the property to reside. To move back in you will need to issue any tenant with a ‘Notice to Vacate’ and provide the tenant with sufficient notice in accordance with relevant state legislations.

In Queensland, a tenant must be given at least 2 months notice to vacate, unless they are in breach of the tenant agreement. From there, the tenancy only ends on the end date of the agreement or the end date of the notice period (whichever is later). 

Contacting your home loan provider

Another important factor to consider when moving into your investment property is the loan you have against your property. It is best to speak to your lender to advise them of your intentions to move in to your investment property, so they can advise you of the implications this will have on your home loan. Your lender will be required to update your loan purpose from ‘investment’ to ‘owner occupied’, which can sometimes attract a lower interest rate! However this purpose change will most likely require you to provide your lender with some form of evidence of occupancy showing your new residential address, like your updated drivers license.

Renting out a room

In the age of the side-hustle, investors are exploring alternatives to continue to generate extra income including moving into the property whilst continuing to rent out a portion, such as a spare room or a granny flat. This allows you as the investor to potentially claim some tax deductions.

The amount you will be entitled to claim through tax deductions is dependent on the area of the property you intend to rent out. If you as an investor are renting out your granny flat which is approximately 20% of the total property area - whilst residing in the remainder of the property - you will be able to claim 20% for deductible expenses such as rates, interest and depreciation.

Tax implications

By converting your investment property to a primary residence, there are significant tax implications relating to deductions and capital gains tax.

Tax deductions

Declaring your investment property to be your primary residence with the ATO will put an end to your eligibility to claim any tax deductions against the property. Should you continue to rent out part of the property as mentioned above, you may be able to claim a portion of these expenses.

Capital Gains Tax

By switching your property from investment to primary residence, significant implications lie upon capital gains tax. Whilst your investment property may be exempt from capital gains tax if it has been the primary residence during the entire period it was owned, the ATO requires disclosure and declaration of any profit on the sale of an investment property.

The ATO notes that if you’ve used any portion of your home to produce income, you’re generally not entitled to claim the full capital gains tax exemption - even if it’s just a single bedroom.

To calculate the capital gain that is not exempt, you’ll need to consider several factors: 

• The proportion of the floor area that is set aside to produce income – in other words, how big is the single bedroom compared to the rest of the property that’s not rented out.
• The length of time you rented out a portion of your primary residence.
• Eligibility to claim the capital gains tax six-year rule.

In the case of a dwelling which was an investment property for one part of the ownership period and a primary residence for another part, capital gains tax is calculated on a pro-rata basis. This means that if you sell a property which you have owned for four years and rented it out for a year before living in it yourself for three years, you are exempt from 75% of the capital gain.

Before making any financial decision based on your investments and their potential future, it’s important to factor in your current financial position and seek advice from qualified financial professionals.

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