A principal place of residence is the land you own and occupy. Essentially, it is the physical address where you live. You can rent out a principal place of residence to generate extra income, allowing you to purchase a new home and use your current home as an investment property in the future. As long as you live in your principal place of residence, you will usually be exempt from taxes.
Renting out part of your PPOR
If you rent out part of your principal place of residence, you need to declare your net rental income on your tax return because now it is treated as an investment property. However, you can claim maintenance costs, water and depreciation.
Selling your PPOR
Once you move out of your home and buy another one to live in, your old house becomes a taxable asset. When you sell your home, you need to calculate the capital you made on the sale and reduce the gain proportionately depending on how long you used the home as your PPOR.
For instance, if you lived in the old home for 15 years and then rented it for 10, your capital gain will be reduced by 60%. (15 years divided by the 25 years you owned the home)
Likewise, if you move out of your home and rent another home, your old home becomes a taxable asset. You still need to calculate the capital gain when you sell the house. This is reduced based on how long you used it as your home. As long as you don’t buy another home to live in after you move out and just rent, you can use the property as your PPOR for up to six-year.
For instance, using the example above, your capital gain is reduced by 84% (15 years you lived in the home plus the 6-year exemption divided by the 25 years you owned the house).
Before deciding whether to purchase a PPOR or an investment property, you should consult with a mortgage broker. The brokers at Mortgage House are experts at the entire lending process and know the benefits of buying versus renting a home.
