Buying an investment property and converting your current residential home into an investment property have very different implications. If you have plans to rent out your home and have your mortgage change from owner occupier to an investment loan, it’s important to ask these questions of yourself first:
If the rental property is your Principal Place of Residence and you have plans to sell it, you might want to abide by the six-year rule so as to avoid paying for capital gains tax (CGT). The six year rule states that if you live in the property and then move out and rent it out, you can claim an exemption from CGT for a period of up to six years. However, if you exceed the six-year rule, you will need to pay for CGT when selling the property.
It’s important to know which investment strategy will suit you the best. One important question is whether your property is positively geared or negatively geared. A property is positively geared if its rental earnings are higher than the cost of owning the property (loan repayments and other expenses).
On the flip side, a property is negatively-geared if you make a running loss on the property. The cost of owning the investment property (loan repayments and other expenses) is higher than the rental income. Negative gearing will reduce your taxable income.
There are tax benefits when you convert your home into an investment property. They include tax deductions you can claim on things like council rates, body corporate fees, agent fees, and more.
Second is depreciation allowances where you can claim depreciation on the building and the plant and equipment in your property. The building allowance refers to the construction cost of the building such as the driveway, the walls, and concrete.
The plant and equipment allowance refers to the items within the building such as the dishwashers and ovens. Before you claim depreciation allowances make sure to get a qualified surveyor to make your depreciation schedule.
An owner-occupier loan has different features to an investment loan. Your requirements from your mortgage may change once you convert your home into an investment property. As an example, you may want to consider an interest-only loan to claim interest as a tax deduction.
We have investment loan products that are suitable for aspiring property investors. You can check them out here and see which products are right for you when turning your home into an investment property.
10 July 2019
Almost a third of all home loans in Australia are for investment properties, according to ABS data. If you're one of these millions of people, then it's worth knowing that owning an investment property can allow for a large number of expenses to be deducted come tax-time.