You’ve finally bought the new family home. Bigger backyard, extra bedroom. Perfect. But what about the old place? The temptation to hang onto it as an investment is strong, especially in Australia's often-booming property market. It feels like a no-brainer: let a tenant pay off the mortgage while the asset grows. But before you jump in, it’s vital to understand the taxman’s take on it, specifically Capital Gains Tax (CGT). Turning your former home into a rental property fundamentally changes its tax status, and the implications can be hefty.
The CGT Tipping Point: When does it make financial sense?
The big question is whether the potential capital growth will be worth the eventual tax bill. A capital gain is simply the difference between what you paid for the property (its cost base) and what you sell it for. This gain is then added to your income for that year and taxed at your marginal rate, which can be as high as 47%.
So, at what point does holding on become more profitable than selling? Real estate analysts suggest a tipping point exists where the capital growth outpaces the tax liability. In many Australian markets, if your property’s value is climbing by more than 5-7% annually, the long-term appreciation can often absorb the hit from CGT. Think about a well-located house in a gentrifying inner-city Melbourne suburb versus a unit in a flat regional market. The growth prospects are worlds apart. This calculation is also bolstered by rental income. A strong rental yield doesn't just cover your costs; it actively pads your return, making the future CGT less of a concern. The Australian Taxation Office provides clear guidelines on how CGT is calculated when you sell a rental property, which is your starting point for any calculation.
Taming the Tax Beast: Smart strategies for your former home
Thankfully, you’re not powerless against CGT. The Australian tax system has several provisions that can significantly reduce, or even eliminate, your liability if you play your cards right.
The most powerful tool is the main residence exemption. If you sell a property that has only ever been your home, you generally pay no CGT. But what happens when it becomes a rental? This is where the famous "six-year rule" comes into play. This rule allows you to treat your former home as your main residence for up to six years after you move out and start renting it, provided you don't nominate another property as your main residence. It’s a real lifesaver for Aussies who might be posted overseas for work or are simply trying out a sea change before committing.
Another key strategy is to meticulously track your costs to increase the property’s ‘cost base’. This isn’t just the purchase price. It includes stamp duty, legal fees for buying and selling, and the cost of major capital improvements. That new deck, kitchen renovation, or added ensuite? They all count. Keeping detailed records can reduce your taxable capital gain down the track.
And don’t forget the 50% CGT discount. If you hold an investment property for more than 12 months before selling, you’re automatically entitled to a 50% discount on the capital gain. This effectively halves the amount that gets added to your taxable income.
The local angle and shifting sands of policy
It’s not just about federal tax law. State and local government policies can also influence your decision. State-based land tax, for instance, is an annual cost that applies to investment properties but not your principal place of residence. This ongoing expense needs to be factored into your cash flow calculations.
The policy landscape is also constantly shifting. For example, the federal government has flagged potential incentives for build-to-rent developments, which could offer new tax benefits for landlords from 2025. Likewise, states periodically review their own rules, with changes to things like the Principal Place of Residence exemption potentially impacting homeowners. Staying aware of these changes is part of being a savvy investor.
Ultimately, deciding whether to sell your old home or hold it as an investment isn't purely a numbers game. It involves your personal goals, your appetite for risk, and your capacity to be a landlord. But getting the tax strategy right from the moment you hand the keys to a tenant is what separates a successful long-term investment from a future financial headache. Getting personalised advice from a qualified tax professional is always the best first step.
