Converting Owner Occupied to Investment Property: ATO Considerations 

The Australian housing market has been booming in recent years, with prices rising steadily in most major cities. As a result, many people who own their own homes are exploring switching to an investment property.  

The Australian Tax Office (ATO) plays a crucial role in this transition, as it’s important to understand the tax implications, such as rental income being taxable and various tax deductions and obligations associated with managing investment properties. 

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. 

And, if you’re able to maintain a positive cash flow, you may even be able to build up a nest egg for retirement. Of course, there are some risks associated with investment properties, but with careful planning and research, you can mitigate these to meet your personal objectives. 

So, if you’re thinking of switching from owner-occupied to investment property, here are a few considerations you should factor into your decision. 

Make Sure You Can Afford to Have and Maintain an Investment Property 

When considering whether to turn your home into an investment property, there are several factors to review. First and foremost, you need to ensure you can afford it as your living expenses are likely to increase. 

If you choose to buy a second property, you’ll have two mortgages and two sets of loan repayments. Or, if you choose to “rentvest” until you find a suitable new home, you’ll be paying rent yourself while also shouldering the cost of your old mortgage. 

Additionally, you’ll need to factor in the cost of maintaining and repairing your rental property, perhaps only partially supplemented by your new rental income. Owners will also need to pay tax on the rental income generated from the property. 

All these costs can add up, so it’s important to do your research before deciding to become an investment property owner. However, if you’re careful and mindful of the potential expenses, renting out your home can be a great way to supplement your income and help you reach your financial goals. 

What Are the Tax Implications of Converting to an Investment Property? 

When you convert your owner-occupied home into an investment property, several tax implications come into play. 

Your primary residence is generally exempt from Capital Gains Tax (CGT) but converting it to an investment property may result in a partial CGT liability when you eventually sell. Areas of the home used to produce assessable income may not fully benefit from the main residence exemption from CGT. 

You’ll need to declare any rental income you receive from the property on your tax return. However, you can claim deductions for expenses related to renting out the property, such as mortgage interest, repairs, and property management fees. 

Additionally, you may be able to claim depreciation on the building structure and fixtures and fittings. 

It’s important to note that as of January 1, 2025, there have been changes to the Foreign Resident Capital Gains Withholding (FRCGW) rules. The withholding rate has increased from 12.5% to 15%, and the $750,000 property value threshold has been removed. The withholding rules now apply to all property sales. 

Understanding the Switch from Owner Occupied to Investment Property

Switching from an owner-occupied property to an investment property can be a significant financial decision. It’s essential to understand the implications of this change and how it can impact your financial situation. When you switch from an owner-occupied property to an investment property, you’ll need to consider the potential rental income, costs of becoming a landlord, and tax implications. 

It’s crucial to consult with a tax advisor to understand the tax implications of owning an investment property and to ensure you’re taking advantage of all the tax benefits available to you. 

Changing your Owner-Occupied Home Loan to an Investment Home Loan 

When you decide to convert your owner-occupied property to an investment property, you’ll need to inform your lender about the change in the property’s purpose from an owner-occupier to an investor. This is because the terms and conditions of investment loans often differ from those of owner-occupied loans. 

Here are some steps to follow: 

1. Contact your lender: Inform them about your intention to convert the property to an investment. 
2. Review your current loan: Your lender will assess whether your current loan is suitable for an investment property. 
3. Consider refinancing: You may need to refinance to an investment loan product, which could have different interest rates and features. 
4. Provide necessary documentation: Your lender may require updated financial information and details about the rental income you expect to receive. 
5. Understand the new loan terms: Make sure you’re clear about any changes in interest rates, fees, or loan conditions. 

Remember, investment loans often have higher interest rates than owner-occupied loans, so be prepared for a potential increase in your repayments. However, the good news is that these higher interest payments are generally tax-deductible for investment properties. 

How Does Renting a Room in an Owner-Occupied Home Affect Taxes? 

If you decide to rent out a room in your owner-occupied home, there are specific tax considerations to keep in mind. For starters, you’ll need to declare the rental income from the room on your tax return.  

You can claim a portion of expenses related to the rented area, such as utilities and mortgage interest. However, it’s important to note that the portion of the home used for rental purposes may be subject to CGT when you sell.  

To ensure compliance with ATO regulations, maintain detailed records of income and expenses related to the rented room. 

Claiming Depreciation Can Make a Significant Difference to Your Bottom Line 

When investing in property, several tax benefits can help offset the cost of ownership. One of the biggest deductions is for property depreciation.  

Depreciation is a non-cash deduction allowing you to claim a portion of the cost of your investment property over its useful life. This deduction can be significant and is one of the main reasons why investing in property can be such a powerful wealth-building strategy.  

To take advantage of this deduction, you’ll need to contact a quantity surveyor to create a depreciation schedule. This schedule will identify your capital works deductions and itemise all the eligible plant and equipment items on your property, as well as their estimated useful life. By depreciating these items, you can reduce your taxable income and potentially save thousands of dollars each year.  

So if you’re looking to maximise your return on investment, be sure to speak to a quantity surveyor about creating a depreciation schedule. 

Can I Move into My Rental Property to Avoid Capital Gains Tax? 

Moving into your rental property can potentially reduce your Capital Gains Tax liability, but it’s not a straightforward process. The ATO has specific rules around this strategy, known as the “6-year rule.”  

This rule allows you to treat a property as your main residence for up to six years while you rent it out, potentially reducing your CGT liability. However, there are conditions and implications to consider. 

For detailed information on how this works and its implications, please refer to our guide on the 6-year rule for Capital Gains Tax. 

Key Takeaways 

• Inform your lender and potentially refinance when converting to an investment property. 
• Be aware of the tax implications, including CGT and rental income reporting. 
• Take advantage of available tax deductions for investment properties. 
• Understand the recent changes to the Foreign Resident Capital Gains Withholding rules. 
• Obtain a clearance certificate from the ATO when converting to or selling an investment property. 
• Consider seeking professional advice to ensure compliance with ATO regulations and to maximise your investment potential. 

Converting your owner-occupied property to an investment can be a complex process, but with proper planning and understanding of the tax implications, it can be a rewarding financial decision. 

Here at Duo Tax, we are experienced in preparing tax depreciation schedules for a range of properties, and we can work with you to maximise your deductions based on your individual circumstances. We can also provide you with ongoing support to ensure that you claim all the deductions to which you’re entitled.  

So if you’re looking for help with your tax depreciation schedule, contact Duo Tax today. We’ll be happy to discuss your requirements and provide you with a no-obligation quote.