Sometimes it can be ideal for investors to move out of their home but keep the old place as an investment. You might be needing to move into a bigger or smaller residence, or may have to move for work reasons.
There are lots of possible reasons, but once the decision has been made to switch your principal place of residence (PPOR) into an investment property, there are several tax implications that you need to be aware of.
You can only have one PPOR in the world, and an investment property is any other property you own that is for rental return and/or capital gain.
As soon as your old home becomes an investment property, any interest on loan repayments paid on that property now become a tax deduction.
Capital Gains Tax Exemptions
In most cases, selling a PPOR is exempt from paying capital gains tax (CGT). Now that your PPOR has become an investment property however, you may be eligible for a partial exemption from CGT.
Property owners may be partially exempt from CGT if the property was not used as the owner’s main residence for the whole period of ownership or if the property was used for income-producing purposes while it was the tax-payer’s main residence and if a loan was taken out to purchase the property the taxpayer could have deducted the interest paid on the loan.
In the first instance, the tax-exempt amount is calculated by multiplying the capital gain with the number of years the property was the PPOR divided by the number of years of total ownership.
So if you bought a property for $500,000, lived in it for three years then rented it out for three years and sold it for $800,000, you have made a capital gain of $300,000. You would be exempt from paying CGT on $150,000 of that however because you only lived in it for half the time you owned it.
CGT 6 Year Rule
A property’s owners can be temporarily away from their PPOR for a maximum of six years at a time without losing the full CGT tax exemption, provided no other property is treated as a PPOR in that period.
You can use the property to produce income in that time and reset the six-year period each time you move back.
For this rule to apply you have to have a good reason to move from your PPOR, such as work or an extended holiday. You might be posted overseas for three years then move back home to your PPOR for a year then have to work overseas again.