Tax Q&A: Renting Out a Property Nominated as Place of Residence

5/07/2018


Q: When nominating a place as my main residence when I first buy it, do I actually have to physically live in it or can I just call it my PPOR and rent it out to someone else from day one? If not, how long do I have to live in it before I can move out and rent it out?

 

- Regards, Matt
 

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A: This is a very good question; please note that there are significant     ramifications of not understanding the rules in this area.

When you purchase your principal place of residence, it is always a good idea to move into this property before you rent it out, otherwise you will not get access to the following tax concessions:

- Market value rule  
If you live in the principal place of residence and then later on purchase a different principal place of residence, you can obtain a valuation on the date the property is first used to produce assessable income. The capital gains tax will then only apply if the value of the property exceeds this in the future (of course, you can only have one (1) principal place of residence at any given time).

- Six-year absence rule 
This enables the taxpayer to rent out their principal place of residence for a period of up to six years, and if they sell the property within six years they will not incur any capital gains tax. You should also note that with this rule you could refresh the six years simply by moving back into 
the property. 

"You will need to demonstrate that you did actually live in the property as soon as practicable after settlement"

Please note, if you rent this property out first and then live in it, you will not be entitled to apply the above rules. You will simply have to apportion any capital gain over the life of the property between the number of days that the property was your principal place of residence and the number of days it was not.

In some cases, this has resulted in taxpayers incurring hundreds of thousands in extra capital gains tax. When compared against the income earned in renting out the property, you could be worse off.

In terms of how long you need to live in the property, there is no legal requirement. However, you will need to demonstrate that you did actually 
live in the property as soon as practicable after settlement. Make sure you can evidence that by having the electricity connected in your name, updating the electoral roll to your new address, and having mail sent to you at your new address. The ATO has been known to go as far as to look at your electricity usage to ensure the amount of electricity used is consistent with the home actually being occupied on a full-time basis.

Please note that you must physically live in the property and cannot simply call it your principal place of residence. Remember, the tax office has the benefit of being able to subpoena rental records, and they can check when you actually rent the property out, so you cannot simply say that you live in the property when you really do not.

Need to know
-  You must move into a new property before leasing it out to be eligible to use the six-year rule.
- You must physically live in the PPOR prior to renting it out to qualify for the tax concessions.
- The tax office can subpoena rent records if necessary.

 

David Shaw
CEO of WSC Group

 

 

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