Taxes for Rental Properties

It is a very popular scenario that home owners (called a Principal Place of Residence or PPR for tax) sometimes convert their residence to a rental property and/or use some of the property for income earning activities or that they sometimes convert a rental property to their home. Moving into and out of property can be caused by a number of factors like:

  1. Going on an extended trip or vacation with the family;
  2. Selling the family home and moving into the rental property;
  3. Leaving one family home, moving into another (maybe downsizing) and renting out the old one;

Regardless of the circumstances, there are taxation implications to think of both immediately and if the property is ever sold.

There’s 3 scenario’s covered by this Blog:

  1. PPR becoming a rental for less than 6 years;
  2. PPR becoming a rental for more than 6 years and;
  3. Rental becoming a PPR.

Rental property tax deductions

When a property is made available for rent (i.e. listed through a Real Estate Agent or through the classifieds), property related costs become immediately tax deductible. So regardless if the property actually earns rental income, costs like insurance, rates, water and mortgage interest become tax deductible and can be written off against all sources of your income.

If the house is new or less than 40 years old, you may also be eligible for a depreciation write-off. A quantity surveyor would need to be engaged to determine this.

For individuals, if chattels (like dishwashers, carpets, blinds/curtains etc.) in the house are new or haven’t been previously used, you may also be able to depreciate these. For other entities, depreciation may be available regardless of the age of the chattels.

Once the property is tenanted and earns rent, the rent is then included in your tax return and if the rent is greater than the property costs, you’ll pay income tax on the rent if you earn more than about $20K per year from all sources.

Can I turn my house (PPR) into a rental property?

If you move out of your home, rent it and then sell it, you’ll most likely earn a capital gain.

The gain will be calculated in one of 3 ways:converting residence to rental property

  1. If you rent it for less than 6 years, don’t buy another home in Australia and sell it, you can apply an exclusion and pay no tax;
  2. If you continuously rent it out for more than 6 years, you have-to get it valued when you move out and some tax may be payable on a proportionate basis for how long you’ve owned it;
  3. It you rent it out for less than 6 years and sell it, you have-to get it valued when you move out and calculate the gain based on the difference between the valuation and the sale price.

There are some more technical applications for how to treat selling costs (like advertising and Agent’s fees) but the basis of the calculation to determine the gain is still the same.

Also read: Three things you should know when it comes to repairs vs. improvements on your rental property

Moving into your rental property

What if I own my rental property

If you move into your rental property that you personally own, it then becomes a private dwelling and the costs associated with the property from the time you move in lose their tax deductibility.

If you ultimately sell the property, there may be a capital gain to consider as it is a partial main residence calculated as:

(Sale price less original cost) x (Main residence occupation days / Total days owned).

Remember however if you never sell assets like property, you’ll never pay tax on any capital gain. Capital gains are only taxable if they are actually sold.

What if my Trust or Company owns it?

If your Trust or Company owns it, you can either rent it off that entity at market rental rates advised to you by a Real Estate Agent or you can just live in it.

If you rent it, the rental property costs remain tax deductible. If you don’t pay rent, the costs associated with the property from the time you move in lose their tax deductibility.

If the rent you pay exceeds the costs, you may have to pay income tax on the difference.

You should also get the property valued at the time it ceases to become available for rent.

If you ultimately sell the property, there may be a capital gain to consider calculated as:

The valuation less the cost (including stamp duty etc).

Remember however if you never sell assets like property, you’ll never pay tax on any capital gain. Capital gains are only taxable if they are actually sold.

For more on Capital Gains Tax – read the NBC CGT Blog on this website.

Using your home (PPR) to run a business

Normally your PPR is not taxed on any capital gain if you sell it.

If you run a business out of a PPR you own and subsequently sell the home and make a gain, the gain will be subject to tax.

If someone else who doesn’t have any ownership rights runs a business out of your PPR and doesn’t pay you any rent and you subsequently sell it, no tax is paid on any gain.

The tax office does provide a capital gains tax calculator Australia but because the rules are complicated you will most likely need professionals with the right expertise to get the right advise. NBC are experts in this area.

Buying an Investment Property? Make your money work for you!