Turning your home into an investment property


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So you're thinking about turning your home into an investment property? Maybe it's because you've decided to upgrade and want to hang on to the old property or maybe you plan to move overseas temporarily.

If you intend to do this, you should let your lender know and be aware that your interest rate might be higher as an investor.

You could stick with your current lender or refinance with a new one. You may also think about changing your loan from principal and interest to interest-only. Make sure you keep this loan and any loan for a new property completely separate so you can be clear about what part of your debt is tax deductible and what isn't.

turning your home into an investment property

There are, of course, tax issues - a key one being capital gains tax. If you convert your home into an investment property, you may lose the CGT exemption for main residences, says Mark Chapman, H&R Block's director of tax communications.

You can choose to have a house that is rented out treated as your main residence for CGT purposes, provided you don't elect to treat another house as your main residence at the same time, he explains.

This is known as the "six-year rule" because the grace period lasts for a maximum of six years if the home is rented out. You are also entitled to another period of six years if you move back to the house and live in it as your main residence before renting it out again, adds Chapman.

"So this 'grace period' is ideal if you're going overseas for a period or working away somewhere in Australia and living in rented accommodation," he says.

He points out that if you buy somewhere you can't also treat that new house as your main residence for capital gains purposes. This is an important caveat to understand because it could mean that turning your old home into an investment property is a bad financial decision - especially if the new home is likely to garner a bigger capital gain that may be taxed. Do your sums.

If you end up keeping the rental property for more than six years, you will be subject to capital gains tax on the period that is not covered by the main residence exemption, says Chapman. The gain would be time-apportioned. That part of the gain reflecting the period the house was covered by the main residence exemption will be CGT free and the part that is not covered by the main residence exemption will be subject to CGT.

If you are moving overseas for an extended period and become a non-resident for tax purposes, something to watch out for is that you may lose eligibility for a CGT discount. Get advice about this issue from your accountant.

If you convert your home into an investment property and the house was built after July 1985, you can claim depreciation, says Chapman. This is something you should employ a quantity surveyor to help you with.

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Maria Bekiaris is editorial campaigns manager for Canstar and former deputy editor of Money. She holds a Bachelor's degree in business.
Miriam Sandkuhler
May 31, 2016 5.40pm

Good article. Turning your home into an investment is a great way to generate additional income. Although before you put your home on the market, consider the number and price of other homes for sale in the area. Getting independent property investment advice from a licensed professional is always a good idea to help with your strategy.

Gregory Willard
June 8, 2016 10.08pm

I have always wondered how home investing can get you money. I had no idea that you can choose to rent out a house that is considered your main residence. I always assumed that if you were going to rent out property that it couldn't be your main residence. Great article, thanks for the information.