How taxes will undergo a change when your rental property becomes the main residence?

When you plan to convert your rental property into the main residence you may lack awareness about tax changes.  It is important to gather this information from property depreciation consultants as they will inform you about the potential tax consequences. When you intend to convert your rental property into the main residence, you must declare this for the purpose of taxes. The primary reason for making this information public is because it will decide what tax deduction you will remain eligible to claim.

Here is how your taxes will be impacted:

What is PROR?

According to ATO, a property becomes your PROR (principal place of residence) when you begin to live and retain your personal belonging in it. When you begin to receive your postal mail at the address of the property or get the property’s related utilities registered in your name. You must gain information about the possible depreciation tax benefit when your rental property becomes your PROR.

Why you need to describe your property?

When you buy an investment property for producing income by renting it out, ATO permits you to claim some expenses. These expenditures include those that you incur while handling your investment property against your rental income as a tax deduction. It may include repairs and maintenance, interest on loans, and council rates, among others. Meanwhile, in the case of PROR, you will enjoy some tax benefits as well. However, you will not be able to claim the expenditure you sustained while managing your residential home as you are not producing any income. Therefore, you will not have any income to offset the expenses against.

Will you qualify for any tax benefit when your rental property becomes the main residence?

The moment your rental property turns into your principal residence, you will be eligible to claim capital gains tax (CGT) exemption. It will be effective for the duration when you live in your investment property. You may seek professional help to calculate depreciation tax deduction on rental property.

What is CGT and how living in your investment property will impact CGT?

As per ATO rules, any profit from the sale of investment property is treated as a capital gain. It must be announced on your income so that ATO can tax accordingly. There will be some scenarios wherein you may avoid paying CGT. It will be when your property becomes your PROR. There is a CGT property six-year rule. The rule permits you to use your property investment as your PROR for duration of up to 6 years as you rent it out. There is a 50% CGT discount in case you possessed your property for 12 months or more prior to selling it.


When your rental property emerges as your primary residence and you announce it as your PROR, you can claim full CGT exemption. The exemption implies that you will no longer be required to pay any tax on the profit secured from the sale of your property in the future. So you should be able to calculate your property depreciation tax deduction in both scenarios effectively. When your rental property becomes your primary residence and you announce it as PROR, and you want to move out once again, you will remain exempt from paying CGT for 6 years.

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