Question: I am in the process of buying some land and constructing an investment property in my name. The cost will be $470,000 when ready. It will be available for residing in 10 months’ time. The loan is an investment loan in my name only. Can I move into the house for say one to two weeks without changing it to my primary residence and put it up for rent and claim a period of six year capital gains exemption? If I am unable to rent it out say for a year, as it is a new estate, can I claim a deduction of interest on the loan from my salary?
Answer: A lot of people move into a new property before ultimately renting it out to trigger the six-year principal place of residence exemption from capital gains tax. Whilst the Australian Taxation Office (ATO) does not provide any guidance with respect to the length of time that you must remain in the place to qualify for the exemption, six months is considered the absolute bare minimum. One or two weeks will definitely not cut the mustard, particularly if you are seen to be doing it as purely for tax avoidance purposes. It is also important to note that you cannot have more than one property being claimed under this principal place of residence exemption. If you choose the new property to have the exemption then you must relinquish the benefit associated with your old property even if you move back into that place.
Deductions for investment properties can be quite substantial and generate large tax refunds, particularly if a property doesn’t generate much rent by comparison. However, the property must be rented, or ‘genuinely available’ for rental, in the income year for which you are allowed to claim a deduction. If your property is available for rent, you may claim interest charged on your loan along with other running costs such as council and water rates. But it is very important that you have a clear intention of renting your property. If you make no attempt to advertise your property or set the rent unrealistically high, the ATO will find that you have no intention of renting your property and your rental claims may not be allowed.
Finally, if you are struggling for cash flow whilst the rent is slow to trickle in, there is an alternative to waiting for the end of the financial year for your tax refund cheque to arrive. You can complete and lodge with the ATO an application for variation of your PAYG withholding and have less tax taken out of your salary.
- Answer provided by Adrian Raftery, mrtaxman.com.au and author of 101 Ways to Save Money on Your Tax – Legally
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