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Converting your current home into a rental property can sometimes be a viable option if you are looking to live in a home that better suits your lifestyle.

Whether you buy somewhere else to live in or go the rentvesting route, there are many considerations to make when initiating this kind of move: Are you going to make the right financial decision? Are you aware of the tax implications the move would trigger? Do you know about the structure of the investment property?

Too many people undervalue the importance of getting this all right, and there are many investors who end up in trouble with the tax office because they made claims that they simply were not allowed to make.

Turning your home into a rental property can be a minefield but here are some questions you should ask yourself before you take the plunge.

Does it make sense to me financially?

You may have decided to move from the house you live in for any one of a number of reasons: It could be that you are relocating for work, but think you may be coming back again to the home you are vacating.

It could also be that you have decided to upgrade to a bigger and better property for yourself, and because you like the one you are moving out of so much, believe it will make a good investment. It could even be that might be moving for a number of reasons, but just cannot bear the thought of letting go of the house you have known and loved so much.

If you turn your home into a rental property, your living expenses are likely to increase, especially in the first few weeks or months that your property is left vacant. Here are some financial considerations you should consider:

  • If you are buying another property, your mortgage repayments will increase.

  • Investment home loans often have higher interest rates.

  • Renovation costs and property management fees are added to your expenses.

  • If you will be renting in a capital city, your weekly rent could be high.

  • Any rental income you could get might not be enough to cover the property-related expenses.

Am I aware of the six-year rule?

If you leave your principal place of residence with the intention of returning at some time in the future, the six-year rule will allow you to vacate, rent it out, make claims for income and expenses, but avoid capital gains tax in the future once you ultimately sell.

As the name of the rule implies, the maximum amount of time you may be absent is six years, after which any sale would attract capital gains tax, at the current discounted rate, on a pro-rata basis for the amount of time the property was a rental.

You may move back in and then move out again, and a new six-year period will commence. This rule is of particular use to people who are in employment which may require them to be itinerant, but who wish to move back home again at some time in the future.

For the six-year rule to apply, you must meet the following conditions:

  • The property must have been your main residence from the time when you acquired it

  • The property may not have originally been a rental

  • If you move out for longer than six years, you may be entitled to a partial reduction in CGT

The main reason why you would elect to maintain your home while being away is because you specifically want to move back into that property, not necessarily because you think it will make a good investment.

Buying an investment property or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for investors.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.19% p.a.
6.58% p.a.
Principal & Interest
Featured 90% LVR
  • You MUST already have Solar or a documented plan to install within 90 days to be eligible for this loan
  • Available for refinance or purchase
  • No monthly, annual or ongoing fees
6.04% p.a.
7.60% p.a.
Principal & Interest
5.94% p.a.
6.58% p.a.
Principal & Interest
6.29% p.a.
6.42% p.a.
Principal & Interest
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of .

Am I emotionally in touch with the home?

If you want to hold on to that property because you love it so much, then think of these two things:

Firstly, if you love it so much, you will not be able to bear watching what others do to it. You will not be able to become emotionally detached, which is something that all investors need to be. You will be needlessly driving past and worrying about how your treasured home is being treated.

Secondly, if you do love it so much, why are you moving? It cannot be that good if you are thinking of leaving it.

But if your emotions are really high about turning your home into an investment property, then you might need to take a step back and get some perspective before continuing with your plans.

Do I know the tax benefits of turning my home into a rental property?

The biggest tax benefit of having an investment property is that you can write off many things as a tax deduction. Here are some of the “investment expenses” you can deduct against your dues:

  • Interest charges

  • Property management fees

  • Advertisement fees

  • Bank fees and loan changes

  • Body corporate fees

  • Council rates

  • Cleaning costs

  • Repairs and maintenance

  • Travel expenses for rent collection and inspections

  • Depreciation

Do I know the benefits and potential drawbacks of turning my home into a rental property?

The benefits of turning your current home into a rental property are dependent on your purpose for doing so.

If you are planning to do so to buy a new home, then you will be able to achieve greater borrowing capacity with more equity already built up in your current property.

You can also maximise the eventual rental income, allowing for a better cash flow.

It can also be the start of your investment portfolio.

If you are going the rentvesting route, doing this can help you live in a place better suited to your lifestyle — you can own a rental property in regional markets and live closer to the city.

Meanwhile, if you own a property in a metropolitan area and can work remotely, you can also choose to have your property listed for rent and lease, or even buy, a regional property.

On the other hand, the wear-and-tear risks could be the biggest drawback of turning your home into a rental property.

You should expect that your house might not be treated the same way you do when you start to rent it out.

Another risk is its appeal to tenants — factors when buying a principal place of residence might sometimes be significantly different when you purchase an investment property.

Your current home might not be able to attract tenants due to its location, design, and accessibility — this could potentially impact rents, which would, in turn, cause a dent in your finances.

This article was first published in May 2010 and was updated on 24 October 2022.

Photo by Magnetme from Pexels.