Can You Live in an Investment Property?

An investment property is typically purchased with the intention of generating rental income and long-term capital growth. However, many Australian property owners wonder whether they can legally move into their investment property and what implications this might have. While it is possible to live in an investment property, doing so comes with significant tax, financing, and regulatory considerations that can impact its status and financial benefits.

Understanding Investment Properties in Australia

An investment property is defined as real estate purchased with the primary goal of earning rental income rather than being used as a personal residence. The Australian Taxation Office (ATO) classifies such properties differently from owner-occupied homes, which means they are subject to different tax rules, loan structures, and financial regulations. Many investors use negative gearing strategies to offset rental losses against their taxable income, making it a popular wealth-building strategy.

Because investment properties are meant to generate income, various financial incentives are available to owners, such as tax deductions for interest payments, property management fees, and depreciation on fixtures. However, when an owner decides to move in, the ATO and lenders no longer classify the property as an investment, which can affect these benefits. Understanding the distinction between an investment and an owner-occupied property is crucial before making the decision to reside in the property.

Can You Legally Live in an Investment Property?

Yes, you can live in an investment property, but doing so has important legal and financial consequences. The main issue is that once you start living in the property, it no longer qualifies as a full-time investment. This change affects tax treatment, as certain deductions only apply while the property is being rented out. Additionally, if the property has tenants under a lease agreement, you must wait until the lease expires before moving in, unless an agreement is reached to terminate the tenancy early.

One of the biggest considerations is the impact on capital gains tax (CGT). If a property is originally purchased as an investment and later converted into a primary residence, different CGT rules apply when it is eventually sold. Investors who move in may be eligible for partial CGT exemptions, depending on how long the property was rented out before becoming their home. Understanding the legal framework is essential to avoid unexpected tax liabilities.

Tax Implications of Living in an Investment Property

Capital gains tax is a major factor for anyone considering moving into their investment property. The ATO allows a full CGT exemption for primary residences, but investment properties are subject to CGT when sold. If you live in your investment property after renting it out, CGT will be calculated based on the time it was used as an investment versus a primary residence. This means that even if you live in the property for years before selling, you may still owe CGT on the period it was rented.

Additionally, many tax deductions investors rely on, such as mortgage interest, property management fees, and maintenance costs, are only available while the property is generating rental income. Once the property becomes owner-occupied, these deductions are no longer applicable. Property owners who plan to move in should carefully assess how this change will affect their tax situation, particularly if they have been benefiting from negative gearing.

Impact on Your Mortgage and Financing

When purchasing an investment property, most buyers take out an investment loan, which typically comes with higher interest rates than owner-occupier loans. If you decide to move into your investment property, you may need to refinance to switch to an owner-occupier loan. Some lenders require borrowers to notify them if they intend to change the property’s purpose, and failure to do so could breach loan conditions.

Refinancing to an owner-occupier loan can result in lower interest rates, reducing monthly repayments. However, this process may involve additional costs such as break fees, application fees, and lender’s mortgage insurance (LMI) if the loan-to-value ratio is high. Before making the move, it’s important to consult with your lender to understand the financial implications and ensure compliance with your loan agreement. It's also a good idea to speak to a refinancing mortgage broker to walk you through the process.

What If You Want to Move in Temporarily?

Some property owners consider moving into their investment property for a short period, either to renovate, reassess their financial situation, or take advantage of personal circumstances. While this is possible, it is important to understand that even short-term residency can have long-term tax implications. The ATO considers the proportion of time a property was used as an investment versus as a residence when calculating CGT, so temporary occupancy could still affect tax liabilities.

Additionally, if you plan to move back out and rent the property again, you may need to review your loan structure and investment strategy. Some tax benefits, such as depreciation claims, may be impacted by intermittent use as a personal residence. If you intend to return the property to rental status after a short stay, it is best to seek professional tax advice to ensure you are making the most financially sound decision.

Strategies to Transition an Investment Property into a Home

If you are planning to convert your investment property into your primary residence, careful planning can help minimise financial downsides. Refinancing to an owner-occupier loan can help reduce interest rates, but it is essential to consider the long-term impact on loan repayments and any refinancing costs. Understanding the tax implications and ensuring the transition aligns with your financial goals is key to making an informed decision.

One useful tax rule to consider is the six-year CGT exemption rule, which allows an investment property to retain its primary residence CGT exemption for up to six years while being rented out, provided it was originally purchased as a primary home. This means that if you initially lived in the property before renting it out, you may still qualify for tax benefits when selling. Strategic planning and professional advice can help optimise your property’s financial advantages during the transition.

Conclusion

While it is possible to live in an investment property in Australia, doing so can have significant tax, loan, and financial implications. The decision should be carefully evaluated based on factors like capital gains tax, mortgage refinancing, and the loss of tax deductions. Consulting a financial or tax expert before making the move can help property owners make informed choices that align with their long-term investment and homeownership goals.

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FAQs

How long do you have to live in an investment property to avoid capital gains?
To qualify for a full Capital Gains Tax (CGT) exemption, you must live in the property as your primary residence from the moment you purchase it. If you initially buy it as an investment and later move in, CGT will still apply for the period it was rented out. However, if you live in the property first and later rent it out, you may be eligible for the six-year rule, which can help reduce or eliminate CGT when selling.

What is the 6 year rule?
The six-year rule allows you to move out of your primary residence, rent it out, and still claim a full CGT exemption for up to six years, provided you don’t treat another property as your main residence during that time. If you move back in at any point, the six-year period resets, meaning you can continue benefiting from this exemption if you later rent it out again.

How long can you stay in your investment property?
You can stay in your investment property for as long as you like, but doing so changes its classification from an investment to an owner-occupied property, impacting tax deductions and loan terms. If you move in permanently, you lose tax benefits like depreciation claims and negative gearing, and may need to refinance your loan. However, if you only stay temporarily and then rent it out again, you may still qualify for the six-year CGT rule, which allows for capital gains tax exemptions under certain conditions.