Turning OOP to IP for Tax Deduction While Still Living in It

justwii on 27/04/2023 - 03:10
Last edited 27/04/2023 - 03:12

Hi, I have been living in my owner occupied property for the past years and is now thinking to turn it into an investment property while still living in it but am going to rent out some of the rooms.

When it comes to tax time, if I want to claim tax deduction on, say the strata fees and furnitures I buy for the tenants, what do I need to show to ATO that it is an IP? And from which date it can start counting as IP? e.g. do I have to change the loan type? do I have to advertise for rental? what if I need a month or two to do some renovations before actually getting someone in? Can the start date be any date I start renovating?
Thank you

Also, if I am still living in it, would the six years rule resets everyday?

Financial

Comments

  • Adredocto on 27/04/2023 - 03:57
    +6

    Sounds more like your are taking on boarders, not renting out your place.

    You still live there so i don't think there would be any change to owner occupier status.

  • bemybubble on 27/04/2023 - 06:15
    +4

    The moment it becomes available for rent is the moment it becomes an IP. They will look for evidence of advertising for example or lease agreements.

    It is worth noting that it’s only when it generates income will it open the door to most deductions you are questioning. Those deductions will have to be pro rata if you’re still living in there for the lettable area.

    6 year rule can’t apply. The property has to cease being your main residence. If you’re living in there then it never stopped being your PPR

  • Summoner on 27/04/2023 - 07:19
    +1

    Hi, I have been living in my owner occupied property……turn it into an investment property while still living in it but am going to rent out some of the rooms.

    You are renting out part of your owner occupied home. This is different from an investment property.

    do I have to change the loan type?

    No. you don't need to.

    do I have to advertise for rental? what if I need a month or two to do some renovations before actually getting someone in? Can the start date be any date I start renovating?

    Below ATO link states following:
    "You can only claim expenses for the days in a year when the room was rented to a client. When a room in your home is not being rented out, it is treated as being used privately as part of your home."
    So, no you cannot claim a deduction while you are renovating part of your home.

    You can find more details here: https://www.ato.gov.au/General/Sharing-economy-and-tax/Renti…

    • justwii on 27/04/2023 - 12:13

      Thanks for the link. So in that case I can still claim cost on renovation, just that the start date is when the rent starts?

      • CheapskateQueen on 27/04/2023 - 21:38
        +1

        the renovation is unlikely to be a deduction. it will be a capital cost that goes to your cost base.

        • justwii on 27/04/2023 - 23:30

          Ah right, thanks for the clarification. So only expenses directly related to renting

  • mskeggs on 27/04/2023 - 07:28
    +2

    You might want to get the place valued by a local real estate agent known for quoting high to help set a baseline.

    • justwii on 27/04/2023 - 12:13

      Almost missed this, thank you!

  • SBOB on 27/04/2023 - 07:30
    +2

    Remember to also consider the portion of the house you're renting out, when you sell in the future, and the percentage of CGT exemption that may no longer apply to that portion (pro rata over ownership period vs rented out period)

    • justwii on 27/04/2023 - 12:18

      Yeah thanks, that got me confused. If I do that, I can never reset that portion for CGT forever even after I move out, right?

      However, if the renting happens after I move out, I can always reset that if I move back in every six year

  • lostgoat on 27/04/2023 - 07:33
    +1

    Do it privately and pay no tax. Plenty of people in the market and easy to find them .

    • justwii on 27/04/2023 - 12:20

      Yeah I know. But I also have incentive to claim reduction on renovation cost. Have to weight them out

      • CheapskateQueen on 27/04/2023 - 21:39
        +1

        yes it was clear what you are hoping to do but you won't be able to claim a deduction for your house renos.

  • DashCam AKA Rolts on 27/04/2023 - 08:53
    +3

    Check your home and contents insurance. You may find that you need different cover if you have lodgers.

  • freefall101 on 27/04/2023 - 10:39
    +1

    Talk to an accountant, because I'm pretty sure the 6 year rule doesn't apply for renting out part of your home. That portion becomes a business that you are generating revenue from - https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence-(home)/Using-your-home-for-rental-or-business/

    You would be using part of your home as a business, which would allow you to deduct certain things but capital gains will likely apply for that portion of the house. It also means you should get a valuation when you start renting part of it out.

    • justwii on 27/04/2023 - 12:23

      Yeah thanks for the link, I guess you are right

  • justwii on 27/04/2023 - 12:08

    Thanks guys, very helpful information!

    If I understand it correctly

    • if I continue to live in the house and rent out some rooms, I can claim tax deduction on strata fees and other expenses for the x% (the rented out part) of the house, but I also need to pay CGT for that x% when the house is sold

    • if I move out and rent out the rooms, I can claim tax deduction on strata fees and other expenses 100%, and I don't need to pay CGT when the house is sold within 6 years, but obviously I need to pay rent to live somewhere else

    So it isn't wise to keep living in the house unless the cost of living elsewhere > the x% CGT + (100-x)% tax deduction, am I right?

    • bemybubble on 27/04/2023 - 12:18
      +1

      I'd base my decision on what is good for quality of life, not what's good for tax…

      • justwii on 27/04/2023 - 12:23

        Haha but the tax savings can improve the quality of life! But I get what you mean

        • bemybubble on 27/04/2023 - 12:23

          Yes it can. But shouldn’t be at the expense of quality of living

    • dtc on 27/04/2023 - 15:08
      +1

      You mentioned renovation costs - most renovation costs are not tax deductible, they are capital costs. they get added to your cost base and taken into account when assessing the capital gain, but they arent deductible against your income

      Ongoing expenses - strata fees, interest costs, rates etc - will be deductible (on a pro rata basis)

      • justwii on 27/04/2023 - 23:31

        Yeah now I understood. Much appreciated!

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