While the Federal Government and Banks are slapping the Property Investor around and making everything more expensive, you could be living in the perfect investment.

Could your existing property

  1. Increase your depreciation claim?
  2. Get you some capital gain relief?
  3. Save you some interest?

This idea is worth exploring, so we have put together some information which might help.

From 1 July 2017, the “Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties.”  2017Budget Paper No. 2

The intention is that, from July 1st, depreciation to plant and equipment will only be able to be claimed by the owner who incurred the cost for the items.

So, if you have owned the property prior to the 9th May 2017, the new restrictions on plant and equipment items will not affect you, as you would have paid for the outlays yourself, potentially giving you access to thousands of dollars in deductions.

By moving out of your property, there are also some Capital Gain exemptions that you can take advantage of.

Andrew Beitz, from Pitcher Partners talks us through how:

Absence makes the heart grow fonder

It’s a quote which resonates with hundreds of thousands of people the world over. But did you know it’s also true when it comes to Capital Gains Tax (CGT)? There are many benefits to the Absence Rule under the CGT main residence exemption.

A dwelling wouldn’t normally be taxpayer’s main residence for CGT purposes once they stopped living in it, but in some cases, they can choose to continue to apply the CGT main residence exemption after they move out.

In fact, if the dwelling is not used for income-producing purposes, that is, if it’s left vacant or used as a family holiday home while the taxpayer is absent, it can continue to be treated as their main residence for CGT purposes for an unlimited time after they stop living in it.

How the absence rule works in general

Did you know, if a taxpayer leaves their main residence and uses it for income-producing purposes while they are away (for example, if it is rented out), it can continue to be treated as their main residence under the Absence Rule in section 118-145 of the 1997 Tax Act?

However, to be eligible for the full CGT main residence exemption, the maximum amount of time it can be used to produce income during a period of absence is six years. A taxpayer is entitled to a new six-year period each time the dwelling again becomes their main residence.

Here’s an example.

Phil buys an apartment in 2016 and lives in the apartment as his main residence for two years before being posted overseas for four years. The apartment is rented out during his absence. On his return to Australia, Phil moves back into the apartment for another two years before again being posted overseas for three years (once more renting it out). He then returns to Australia at the end of his second overseas posting and sells his apartment.

Even though Phil has rented his apartment out for seven years in total while he was away – that’s providing he has not chosen to treat any other dwelling as his main residence for CGT purposes during this time – he may choose to treat the apartment as his main residence for both leaves of absence because each time was less than six years.

Due to this, Phil can claim the full CGT main residence exemption when he sells his apartment.

An important point to note about the Absence Rule (section 118-145, 1997 Tax Act) is that if a dwelling is not used for income-producing purposes for more than six years, it can be treated as a main residence for an indefinite amount of time.

Here’s another example.

Jess buys a house in 2016 and lives in the house for two years before moving overseas for an indefinite period. The house is rented out for the first five years of her absence and is left vacant for another three years before Jess decides to return to Australia. Once she gets back, Jess sells the house immediately.

Provided she has not chosen to treat any other dwelling as her main residence for CGT purposes during her period of absence, Jess may choose to treat the house as her main residence for the entire eight-year period as it was not used to produce income for more than six years.

In this instance, Jess can claim the full CGT main residence exemption when she sells her house.

Decision making: When to make the choice.

A taxpayer’s decision to continue to treat a dwelling as their main residence does not need to be made when they move out or start using the dwelling to produce an income. Instead, the choice is made for the income year in which the CGT event happens to the property.

However, once this choice is made, a taxpayer cannot usually treat any other dwelling as their main residence during that period. The exception to this rule is if the client is changing main residences and can take advantage of the six-month “change over rule” (outlined in section 118-140 of the 1997 Tax Act).

The choice a taxpayer makes will then be reflected in how they treat the sale of that property for CGT purposes in that year’s relevant Australian tax return. What does turning your home into an investment look like to the Bank?

Mark Macnab talks us through this….

From Home to Investment

Should you choose to turn your current home into an investment property, your existing home loan will not necessarily change. That is, your repayments, rate and existing loan terms may remain the same.

However, this may or may not be appropriate for your specific situation so read on…

Often investment loans are established with interest-only repayments to help in reducing outgoings associated with the investment property. Your home loan generally requires principal and interest repayments.

Up until very recently, there was no difference between the interest rate associated with an investment loan and the interest rate for a home loan. With recent changes however, which the National Banking Regulator has decided to create for the Banks, this is unfortunately no longer the case.

If you have an investment loan and/or an interest-only loan, you will pay a higher interest rate.

 This makes it much more attractive now for an investor to establish their loan on a Principal & Interest Basis than it has been previously.

Once you inform your Bank that your home is now an investment property, they will more than likely increase your interest rate. If you choose to instead convert your loan from Principal & Interest to Interest Only, the Bank will also increase your interest rate – so choose carefully!

If you are on a fixed interest rate then nothing will change until the end of your fixed term, unless you choose to break the fixed rate contract.

With so many options to consider, my suggestion would be to speak with an experienced Mortgage Broker who can provide you with the right information so you can make an informed decision.

So, there you have it, the experts have spoken. Hopefully this has given you some useful insight into ways to make the most of your investment.

If you need further information or have questions, please get in touch with the team at Real Property Matters and we will be happy to help.