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If you own an investment property, you’ll be aware that you can claim tax deductions for holding costs (also known as carrying costs), such as rates, insurance, and loan interest.
However, did you know that in cases where you move into your own rental property and make it your home, holding costs, while not deductible at this point, can be added to the property’s cost base, reducing the eventual capital gain and tax you pay when you sell?
Because of this, you should continue to keep records of your holding expenses when you live in it. It’s a little loophole many people don’t know about, so we thought it might be helpful to run through it.
Here’s an example scenario to explain what it looks like in practice:
You purchased a property in 2010 as an investment and rented it out until 2015. In 2015, you decided to move into the property and make it your main residence.
From 2010 to 2015, you claimed tax deductions for various holding costs (fixed costs and variable costs), including:
In 2015, you moved into the property, and it became your primary residence. From 2015 onwards, you could no longer claim these holding costs as tax deductions.
Even though you couldn’t deduct these costs while living in the property, you kept detailed records of:
In 2024, you decide to sell the property. Here’s how the holdings costs can impact the capital gain calculation:
1. Cost base adjustment: Since you moved into the property and made it your main residence, the holding costs incurred during this period (2015-2024) can be added to the property's cost base. This increases the cost base and thereby reduces the capital gain.
2. Capital gain calculation:
3. Sale price (2024): $800,000
4. Capital gain:
By keeping records of your holding costs, you’ve increased your cost base from $500,000 to $550,000. This reduces your capital gain from $300,000 to $250,000. This capital gain is then further reduced pro-rata for the days the property was your main residence, along with the CGT discount.
Because the property was originally an investment property, you’ll need to pay Capital Gains Tax (CGT). Applying holding costs effectively lowers the tax you need to pay.
To facilitate the reduction, it’s important that you maintain detailed and accurate records of your holding costs—both when your property is rented out and when you move in.
Make sure you document everything from major expenses like mortgage payments and property taxes to minor costs like maintenance supplies and utility bills, and keep receipts, invoices, and bills organised and accessible.
It’s much easier to keep the records as you go rather than try to piece together annual council rates and insurance years later.
In addition to this, we recommend you schedule regular times to reconcile your financial records. Compare bank statements with your recorded expenses to catch discrepancies early and ensure accuracy.
If you’re unsure about what expenses to include in your holding costs or how to categorise them, it’s important you speak to your accountant or tax advisor.
Don’t forget to include costs such as while transitioning the property for personal use. These should be factored into your overall holding costs.
Even if holding costs are not deductible while living in your once-rented property, we hope this has made it clear how maintaining accurate records of these expenses can pay.
Adding holding costs to your cost base can significantly reduce your capital gain when you sell the property, providing substantial tax benefits. It’s a little extra admin effort for a win you’ll be happy about when the time comes.
If you’re transitioning your investment property to your home or need some advice around holding costs, reach out to your Maxim advisor or contact our team today.
