When is it wise to turn your residential home to a rental property?

There could be an array of reasons why someone would decide to turn their residential home into an investment property. However, no matter what these reasons are, such kind of decision is actually a bit tricky given that it entails some serious tax and financial considerations to be taken into account.

The first question you have to ask yourself is “Am I making the right decision?” And if so, are your finances able to support your decision? It’s alarming to know that a lot of people neglect the importance of adhering to the taxation laws and end up getting in trouble for it.

Here’s our guide to help you through the rough patches of starting up your property investment.

Are you making the right decision financially?

Let us say you are being temporarily relocated for work so you have to leave knowing that you will be back after a while. Or it could be that you are upgrading to a bigger house but find it hard to let go of your current home that you have grown so attached to for years. Whatever reason you have, make sure you put enough thought into every step you make and see to it that logic is always on top of your emotions.

Are you temporarily vacating?

If you are leaving your current dwelling with the intention of coming back to it in a few years, you have to take into consideration the six-year rule for capital gains tax exemption. This rule enables you to rent your property out, make claims and avoid capital gains tax in case you wish to sell your property in the future.

Here’s how it works. You leave your place of residence, move back in after six years and then move out again to commence a new six-year period.

Conditions:

• The property should be your primary place of residence since you first acquired it.
• The property is not originally a rental.
• You may be entitled to a partial reduction in CGT if you vacate the property for more than 6 years.

Depreciation

Typically, there will not be a depreciation schedule prepared for properties that owner occupied. The property does not income generate so the property owner does not have access to claims for the property’s loss of value.

Should you decide to move out of your residence and turn it into a rental investment, you must seek the services of a quantity surveyor to estimate the value of the property, including its furniture, fixtures and fittings.

When the property is able to produce some income, only then you can claim any balance of building claims and the loss of value of fittings, furniture and fixtures. It’s an important step you shouldn’t miss if you want to benefit from tax breaks.

If you’re certain about moving to a new home either to upgrade or to just start anew somewhere make sure you ask yourself some questions first. Does your property really have potential for growth? Whatever business route you decide to take, make sure that you are doing so with a commercial mindset.