However, you can convert an investment property into your main home whenever you want. If you choose to sell a rental or vacation home for more than what you paid, the Internal Revenue Service will charge you a capital gains tax. The short answer to this is that yes, it is possible for an investor to reside in your investment property. However, when you decide to move to an investment property to become your primary residence, the first thing you need to do is inform the Australian Tax Office (ATO) of this change.
While converting a rental property to a residential property is as simple as moving, the financial implications are much more important. Converting a rental to a residence eliminates your ability to deduct property expenses from your taxes. It also changes the way it will be treated when you sell it. While you may gain the ability to take advantage of the personal residence capital gains haven, converting it will not eliminate your depreciation recovery tax liability.
The biggest result of changing an investment property to POR is its effect on capital gains tax. Once you live on the property as your primary residence, you lose some of the tax deductions you could take when it came to an investment. We look at what smart investors need to consider before converting an investment property into a primary residence. Maybe you bought a property as an investment even though you couldn't afford to live in it yourself at the time, but now you can.
In fact, if the sale of investment property occurs in a period of time in which section 121 can still apply, the government has allowed the application of both tax codes. One option the landlord has is to move out of the primary residence and establish the property as an investment. In the case of a home that was an investment property for part of the ownership period and a POR for another party, the CGT is prorated on a pro rata basis. Making the change from investment ownership to POR will mean that an investor will no longer report rental income and will not be able to claim any deduction.
Therefore, it is essential that investors consider the general consequences of renovation while residing in an investment property. However, turning an investment property into a POR depends on many factors, and there is no single answer to this question that fits all circumstances. If you are facing a large tax bill due to the ineligible use portion of your property, you can defer paying taxes by completing a 1031 exchange for another investment property. Investment properties, on the other hand, generate income and, therefore, the investor can claim tax deductions as a result.
Initially, the first step for any investor looking to convert their investment property into their POR is to seek professional advice from their accountant, who can explain in detail the tax implications of the conversion, taking into account the individual's circumstances.