You may continue treating your first home as your main residence for capital gains purposes when you stop living in it and rent it out for up to six years. You must consult your tax adviser to determine the capital gains tax implications from the sale of your property.
According to the Australian Taxation Office (ATO), you can keep treating your dwelling as your primary residence for up to six years for CGT purposes. So even if you're not living in it, you can rent it out and return to it at any time within six years and it will still be CGT-free (with some conditions).
Making the switch from an owner-occupied property to an investment property can be a great way to secure your financial future. For example, by renting out your property, you'll be able to generate rental income that can help to cover your mortgage payments and other expenses.
The tax gains of rentvesting
Additionally, if you buy a property, live in it for six to 12 months, then rent it out, you don't pay any capital gains tax on the growth in that investment for six years.
This means that you would be able to sell the property within the six-year period and be exempt from paying capital gains tax just as you would if you sold the house considered your main residence. The six-year absence rule exists because there are many reasons why you may not be living in your property for some time.
How long do you have to live in a house to avoid capital gains tax in Australia? To avoid CGT, you'll need to live in a property for twelve months for it to be counted as your main residence before you can move out and use it as an investment property.
Australia's six year absence rule allows you to turn your primary place of residence (PPOR) into an investment property and collect rent and claim depreciation for up to six years provided you've stopped living there. When it comes time to sell you won't be liable for capital gains tax or CGT for those six years.
Generally, you can only claim one principal place of residence exemption anywhere in Australia at a time, although there are limited exceptions to this rule.
Centrelink has an income and assets test, and it applies whichever test results in lower pension payments. Your investment property will come under the asset test regardless of whether it is tenanted.
Many renters like to rely on the 30% rule, which means a maximum of 30% of your income goes to rent. An ideal amount is about 20%, but 25% is also a good target to aim for. However, this isn't always feasible on a low income, as average rents in your chosen area may well be above 30% of what you're earning.
Generally, you'll need 20% of the property's value (which is determined by the bank's valuation of the property) as your deposit, to avoid paying Lenders Mortgage Insurance (LMI).
Your first property purchase doesn't have to be the property you live in. Sometimes called rentvesting, plenty of first-home buyers purchase an investment property where they can afford and rent where they want to live.
You can buy a new home before you sell your existing property with a bridging or relocation home loan. A bridging home loan bridges the financial gap' between two home loans. Bridging home loans are commonly used to finance the purchase of a new property while your current property is being sold.
How much deposit do I need for my new property? As a general rule, you should aim for a 20% deposit for your new property. Remember, your usable equity that you could put towards a deposit for a new property is 80% of the current value of your home, minus what you still owe on the loan.
In most cases, it might be a smart move to pay off your investment property before you retire. However, you will lose access to that large chunk of cash, which you might otherwise need for retirement.
Negative gearing can apply to any type of investment, not just housing. Individuals who are negatively geared can deduct their loss against other income, such as salary and wages.
This is lease or rent money you get from a property you own. It counts in your income test.
In some parts of Australia, you could own ten investment properties with a total value of less than $2 million, whereas in Sydney or Melbourne you may end up with only two properties (or less) for that value.
Bank interest reviews. We check your bank account information is up to date. We do this to check we paid you the right payment and amount in the past.
An exception to this is the 6 month rule which states that where a taxpayer acquires a new dwelling that is to become their main residence, and the taxpayer still owns their existing main residence, both dwellings can be treated as the taxpayer's main residence for a period of up to 6 months.
1.6% of Australians own 2 investment properties.
Another way to avoid or reduce CGT is by increasing your property's cost base. This is the cost of acquiring, holding, and disposing of a property, and is subtracted from the selling price to give you your capital gain. According to the ATO, the cost base of a CGT asset is made up of: The money you paid for the asset.
The Principle Place of Residence Exemption
As a general rule, you can avoid capital gains tax when selling your investment property if that property is your primary place of residence (PPOR).
It's never too late to invest in property
Investing involves maximising returns by using your income-producing years to hold investments over the long term. So, with at least 10 to 15 years of working life still in front of most 50-year-olds, property is still an exceptional investment to consider.
You cannot have two principal residences, to put it simply. You must choose which of your residences will be regarded as your principal residence before filing your taxes.