If you’re just learning how to rent out a property, you might be wondering if you have to live in a house for a year before renting it out. An essential thing Covid taught me is that priorities and financial situations can change overnight. You can’t be too certain about what tomorrow holds, right? In the course of the pandemic, property value drastically changed.
One interesting thing I learned is that certain factors can influence property values no matter what we do. Also, these factors could affect my choice of the first property, what I want from housing, and my place of residence.
So far as I know, house ownership is a long-term commitment, except, of course, you are a house flipper. However, I have also noticed that circumstances can force you to move to new property sooner than you would have expected. These circumstances could be new jobs or even a move to the countryside. Whatever the reason, I can tell you that you will have to pay a penalty if you move too soon.
One other thing I must tell you is that setting up your house as an investment home loan rental property is not an overnight decision. Preparation is king in this situation.
Additionally, I would like to mention – don’t get enticed by your neighbour that rents out their home for rental income. Remember, we all flex our financial muscles differently, so what’s good for the goose may not be necessarily good for the gander!
You must have a solid financial plan before renting out your home. There are things you should know before renting out your home. It would be best to consider sales of your principal residence. Once you have sold it, you can invest the money in another investment home loan property. Financial literacy is your way out here!
How long do you have to stay in a house before renting it out?
Several people frequently ask me to help them understand the duration they must stay in a house before renting out. Otherwise, no one would bother to inquire about this. I always have one thing to say; you must stay in the property for at least a year before turning it into an investment property. After being owner occupied, to rent out the home you should stay on the property for a year.
Renting your house before then will only deny you any tax deductions on rental income. Now, let’s be honest, who wouldn’t like a good ol’ tax reduction? I know I certainly would!
One way to avoid capital gains tax on rent is by staying on your property for at least 12 months before renting it out. It is one of the surefire moves in my rental tax gains playbook, and it works every time. If you have used the house as an investment property beforehand, there could be a whirlwind of complications trying to rent it.
One other thing I implore you to consider if you want to avoid capital gains tax is whether you run your business from your home property. You also have to consider how long you have owned that particular property. All these factors play vital roles in capital gains tax avoidance.
I have another proven method to help you get past capital gains tax. Wanna hear it? Let’s go! Instead of selling your apartment, you can convert it into a rental and lease it out. Sounds good, yeah? Renting out your first property investment in Australia instead of selling it is advantageous for several reasons. Renting your first property helps you to avoid the six-year rule on capital gains tax deductions.
Tips for an owner occupier
Over time, I have amassed several tips any property owner can use to make property investments as smooth as butter. If you have lived in the property for over 12 months, you can lease out the property for six years. Leasing the property for six years allows you to claim the interest rate on the rental income without any capital gains tax. However, I will have you know that you must return to the property after six years to avoid taxation.
Upon return to the property, the clock resets, and you must stay another 12 months. Thus, you can re-rent the property after that without triggering any capital gains tax. Suppose you travel out for business a lot and rarely spend time in your home. In that case, I recommend you use this method. However, I must strongly point out that you must live within the property for a year before you can rent out. I will now go ahead to give you the most valuable tips on how to venture into investment renting in Australia.
Reduce mortgage repayments
The very first thing you have to do as an investment renter is reduce the mortgage repayments. I would advise you and the lender to leverage any small debt you have on the property to claim tax exemptions. If, however, you cannot return the property after six years, I suggest you and your lender take the tax benefits and sell off the house.
Learn about property management fees
Did you know you could use the capital gain you obtained from selling your old property to get a new home loan after paying capital gains tax? If you did not know previously, I am here to tell you that you can do it. If you have enough money left after making the home loan purchase, you can obtain property solely for renting it out.
In some instances I have met, investors usually use the income from renting out their old property to cover mortgage loan repayments on their newly acquired properties. Smart move, don’t you think? This is a solid strategy that works magic for me because you do not need to use your savings to pay for the new house. Thus, you can seamlessly pay off part of your loan, the interest and principal on your mortgage, and use the capital for your home loan.
Below are a few key things you should note whether you want to keep your own home as an investment property or buy a new home loan an investment property;
Always separate your loans
If you have existing principal loans on your old home, you can convert it to an interest-only loan and keep it separate from your new home. Thus, this will clear the loans relating to your financial property.
Ensure your new investment was once your home positively or negatively driven
Since it’s a property that you’ve been making mortgage repayments on, you should positively gear it. Your expected income from the property is more than maintenance and management expenses. Hence, you should place your loan under the name of a low-income earner. It’s a great way to avoid unnecessary taxes and help you pay off your debt quickly. Furthermore, it also increases your cash flow.
Why should I rent out my property instead of selling it?
I think one of the fundamental reasons to rent out your property instead of selling is the prospect of rentvesting and market value. If you suspect the market value of the property will go up, you can rent instead of selling it. Let me illustrate an example to help you understand this scenario
If the rental property in question is from a fast-growing area, it will probably experience significant capital growth. So, you can consider renting to family or renting out a room in your home. However, I must warn you that you will have to pay taxes. Also, you must keep coming back to the property after six years to live in and reset the tax clock.
People also ask
What is capital gains tax in a main residence?
Capital gains or capital gain tax is a tax payment the government fixes on an investment property owner’s profits or capital gain, when they sell an investment property.
Why should I pay capital gains tax?
Because you don’t have an income tax or have to get a visit from a tax return from the Australian tax office, paying a tax-deductible capital gains tax is a law in Australia; you have a tax liability and may experience jail time if you have tax implications.
Are there any capital gains tax implications?
It is best to take your tax advice from reputable sources. Ensure to consult your tax adviser to stay on the right side of the law.
