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Convert Home to Investment

How to Convert Your Home Into a Rental Property

Thinking about moving out of your home and renting it out instead of selling? Smart move! 

But there are some important steps you need to take right away to make sure you’re not leaving money on the table.

Moving out and converting your owner-occupied property into an investment property can be a great financial decision. But the moment you hand over those keys to your first tenant, the clock starts ticking on some valuable tax benefits.

There are some important Steps to take, like getting a depreciation schedule, considering the 6-year capital gains tax rule, making sure you’re not missing all the available investment property tax deductions and understanding the importance and effects of negative gearing investment property.

Here’s our awesome step-by-step guide to doing it right from day one.

Step 1: Get a Depreciation Schedule Immediately

(Don’t Skip This!)

This is the first thing you should do – even before you find tenants.

A depreciation schedule is a report prepared by a quantity surveyor that shows the value of the building and all fixtures (such as carpets, hot water systems, dishwashers, and air conditioners), and how much value they lose each year.

Why does this matter?

The Australian Tax Office lets you claim this “wear and tear” as a tax deduction, even though you’re not actually spending any money. It’s essentially free money back at tax time.

How much can you claim?

Even if your property is 8-10 years old, you can often find $30,000-$50,000 worth of deductions to claim over the next several years. That translates to real cash back in your pocket.

The cost?

Usually between $500 and $800 for the report. It pays for itself in the first year through tax savings.

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Important things to know:

  • You can claim depreciation on properties built after 1985
  • Older properties have more limited claims, but there’s usually still something to deduct
  • The sooner you get this done, the better – you can backdate claims but it’s easier to start from day one
  • Choose a qualified quantity surveyor who specialises in tax depreciation

Don’t put this off. 

This is one of the easiest ways to save thousands in tax, and many property investors miss out simply because they don’t know about it.

Step 2: Start Tracking Every Single Expense from Day One

The day you move out is the day your property becomes an investment for tax purposes. From that moment forward, every expense related to the property becomes tax-deductible.

Set up a system immediately:

A separate bank account for all property-related income and expenses makes tracking so much easier at tax time. A dedicated email folder for all property-related receipts, invoices, and correspondence is also a must. Rounding things out, a simple spreadsheet or accounting software will help you track everything in one place.

What you can claim as tax deductions:

Regular expenses:

Loan interest is usually your biggest deduction — and it can be substantial! Council rates, strata fees (for apartments and townhouses), landlord insurance, property management fees, water charges, repairs and maintenance, gardening and lawn mowing, pest control, and cleaning between tenants are all claimable too.

One-off expenses:

Advertising for tenants, legal fees for lease agreements, and quantity surveyor fees (for your depreciation schedule) can all be claimed.

Pro tip: Keep every single receipt. Even small expenses add up over a year. A $50 garden service or an $80 plumber fixing a tap — that’s real money back at tax time.

What you can’t claim:

Principal loan repayments (only the interest portion is deductible) and improvements or renovations (these get added to your cost base for capital gains tax instead) are off the table.

Step 3: Get a Property Valuation Right Away

This step is critical and many people miss it!

You need to get a professional property valuation done at the time you move out and start renting the property. This valuation becomes your “cost base” for capital gains tax calculations if you ever sell.

Why does this matter?

When you eventually sell the property, the ATO needs to know what it was worth when it became an investment property. That’s the starting point for calculating any capital gains tax you might owe.

Two options:

  1. Full professional valuation – More expensive ($300-$600) but gives you a detailed report
  2. A Desktop Valuation from your Mortgage Broker
  3. Real estate appraisal – Free from your agent, less formal but still useful

Get this done within the first month of renting out the property. Don’t rely on online estimates – you want proper documentation.

Step 4: Understand the 6-Year Rule 

(This Could Save You a Fortune!)

This is the big one that could save you tens of thousands of dollars – possibly even over $100,000 depending on how much your property increases in value.

What is the 6-year rule?

The Australian Tax Office has a special rule for capital gains tax (CGT): You can treat your old home as your main residence for CGT purposes for up to 6 years after moving out – but only if you don’t buy another property and claim it as your main residence.

What does this mean in simple terms?

If you sell your property within 6 years of moving out, and you haven’t bought another home during that time, you might pay ZERO capital gains tax on any profit from the sale.

Example:

  • You move out in January 2025 and start renting the property
  • You rent another place to live (you don’t buy)
  • Property value when you moved out: $700,000
  • You sell in December 2030 (within 6 years): $950,000
  • Profit: $250,000
  • Capital gains tax you pay: $0 (saved potentially $50,000+ in tax!)

Important conditions and things to watch:

  1. The 6 years starts from when you move out – not when you first bought the property
  2. If you buy another home and claim it as your main residence, the 6-year rule stops immediately – This is where people often trip up. If you buy a new home to live in, you have to choose which property to claim as your main residence.
  3. After 6 years, you start paying CGT on any growth from that point forward
  4. You must keep good records – especially that property valuation from when you moved out
  5. Renting doesn’t affect the rule – You can rent where you live and still be covered by the 6-year rule on your investment property

Step 5: Check Your Land Tax Situation

Here’s something that catches many new landlords by surprise: land tax.

What is land tax?

Most Australian states charge an annual tax on the land value (not the total property value) of investment properties. When the property was your home, you didn’t pay land tax because of the “principal place of residence exemption”. But now that it’s an investment, you might have to pay it.

Land Tax Thresholds Across Australia (2024-25):

  • NSW: $1,075,000 (very generous!)
  • Victoria: $50,000 (catches almost everyone)
  • Queensland: $600,000 (pretty reasonable)
  • South Australia: $626,000 (reasonable)
  • Western Australia: $300,000 (moderate)
  • Tasmania: $50,000 (low like Victoria)
  • Northern Territory: No land tax at all!
  • ACT: Different system – it’s built into rates

Critical point: Land tax is based on LAND VALUE ONLY, not the total property value.

Step 6: Update Your Insurance Immediately

This is a quick one but really important!

You need to switch from home and contents insurance to landlord insurance.

Landlord insurance covers:

  • Loss of rent if tenants stop paying
  • Damage caused by tenants
  • Legal costs if there’s a dispute
  • Malicious damage

Building insurance still covers the structure (fire, storm damage, etc.)

Contents insurance – you probably don’t need this anymore unless you’re leaving furniture in the property

Step 7: Understand Negative Gearing and Your Cashflow

Once you start renting out the property, you need to understand your cashflow position.

What is negative gearing?

This is when your rental income doesn’t cover all your expenses — so the property is costing you money each week.

Example:

  • Weekly rent: $600
  • Weekly mortgage payment: $750
  • You’re $150 per week out of pocket = $7,800 per year

Put a Cashflow Buffer in Place (This is Critical!)

Here’s the reality: your property won’t always have a tenant in it. Vacancy periods between tenants happen, and sometimes tenants leave unexpectedly.

Budgeting for vacancy is essential! A good rule of thumb is to set aside at least 2–3 months of rent as a buffer. This covers you for vacancy between tenants (typically 2–4 weeks), unexpected repairs before a new tenant moves in, tenants who stop paying rent (even with insurance, there’s often a gap), and emergency maintenance that needs immediate attention.

 

Why Interest-Only Loans Make Sense for Investment Properties

A lot of people think they should be paying down their investment property loan as quickly as possible. But for investment properties, that’s often the wrong strategy. Here’s why:

The Tax Deduction Problem:

When you make principal and interest repayments on your investment loan:

  • The interest portion is fully tax-deductible ✅
  • The principal portion is NOT tax-deductible ❌

Where Should Your Money Go Instead?

This is the really important part: If you’re paying down your investment loan with principal payments, you’re using after-tax dollars that could be working much harder elsewhere.

Better uses for that money:

  • Pay off credit cards – If you have credit card debt at 20% interest, why would you pay down a 6% investment loan? Pay the expensive debt first!
  • Pay off car loans – Car loan at 8-10% interest? That’s costing you more than your investment loan and it’s not tax-deductible.
  • Pay down your own home loan – Your home loan interest is NOT tax-deductible, but your investment loan interest IS. Pay down the non-deductible debt first.
  • Build your emergency buffer – Having 6 months of expenses saved gives you security and options.
  • Invest in offset accounts – Money in an offset account against your home loan saves you non-deductible interest.

The Smart Strategy:

  1. Keep your investment loan on interest-only
  2. Maximise your tax-deductible interest
  3. Use the extra cash flow to pay down non-deductible debt (credit cards, car loans, home loans)
  4. Once your non-deductible debt is cleared, then you can start paying down the investment loan if you want to

Step 8: Keep Excellent Records From Day One

Cannot stress this enough: good records = maximum deductions = lower tax bill.

Keep all receipts for every expense, rental income records, property valuations, depreciation schedules, loan statements, and any legal documents for at least 5 years after you sell the property.

Step 9: Get Professional Tax Advice

This is not optional – it’s essential.

The money you save through proper tax planning will be way more than the accountant’s fees. A good property tax accountant will make sure you claim every deduction, help you understand the 6-year CGT rule, and keep you compliant with all ATO rules.

Step 10: Think About Your Long-Term Plan

Before you rent out your property, think about your 5-10 year plan. Will you move back? Will you buy another home? When might you sell? These decisions affect how the 6-year rule works and what your tax position will be.

The Bottom Line

Turning your home into an investment property can be a smart financial move, but you need to do it right from day one.

The essential action steps:

✅ Get a depreciation schedule immediately

✅ Start tracking every expense from day one

✅ Get a property valuation when you move out

✅ Understand how the 6-year CGT rule works

✅ Check your land tax situation

✅ Update your insurance

✅ Plan for your cashflow (negative gearing)

✅ Keep excellent records

✅ Get professional tax advice

✅ Think about your long-term strategy

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Need Help?

At Awesome Lending Solutions, we help Australian property owners make smart decisions about their mortgages and investments every day. 

Get in touch with us today and let’s make sure you’re not leaving money on the table!

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    Frequently Asked Questions

    Do I need to tell my bank when I convert my home to an investment property?

    Yes, you must notify your lender immediately when you move out and start renting your property. Your owner-occupier loan agreement typically requires the property to be your primary residence. When you convert it to an investment property, your lender may:

    • Change your interest rate (investment loans usually have slightly higher rates)
    • Adjust your loan terms and conditions
    • Require you to switch to an investment loan product

    Not telling your lender could breach your loan contract and cause serious problems. The good news? Many lenders make this process simple with just a form or letter, and you might be able to negotiate better terms like switching to interest-only repayments to improve your cashflow.

    Pro tip: Contact your mortgage broker or lender before you move out to understand exactly what changes will happen and whether refinancing to a better rate makes sense.

    Most lenders require you to live in your owner-occupied property for at least 6-12 months before converting it to an investment property. However, if your circumstances change unexpectedly – such as relocating for work, family reasons, or relationship breakdown – some lenders may allow you to rent it out sooner.

    Every lender has different policies, so it’s crucial to:

    • Check your loan contract for any minimum occupancy requirements
    • Contact your lender to explain your situation
    • Get written approval before listing the property for rent

    If you’re planning ahead and know you’ll want to rent out your property within the first year, discuss this with your mortgage broker upfront. They can help you choose a lender with more flexible policies.

    Not necessarily! This is where the 6-year CGT rule becomes incredibly valuable.

    Under Australian tax law, you can treat your former home as your main residence for Capital Gains Tax purposes for up to 6 years after moving out – but only if you don’t buy another property and claim it as your main residence.

    What this means:

    • If you sell within 6 years of moving out (and haven’t bought another home), you may pay $0 in Capital Gains Tax
    • This could save you $50,000-$100,000+ depending on how much your property has grown in value
    • After 6 years, you only pay CGT on growth from that point forward

    Example: You moved out January 2024, property worth $800,000. You sell January 2029 (within 6 years) for $1,000,000. Result: $200,000 profit with potentially zero CGT!

    Important: You must get a property valuation when you move out to establish your cost base. Talk to an accountant before buying another property, as this decision affects your 6-year rule eligibility.

    Negative gearing actually creates a tax benefit! When your rental income doesn’t cover all your property expenses (mortgage, rates, maintenance, etc.), you’re “negatively geared” – and that loss is tax-deductible.

    Here’s how it works:

    • Rental income: $31,200/year ($600/week)
    • Total expenses: $39,000/year ($750/week)
    • Annual loss: $7,800

    You can claim that $7,800 loss against your other income (like your salary), which reduces your overall tax bill.

    Example:

    • Your salary: $90,000
    • Rental property loss: $7,800
    • Taxable income: $82,200
    • You pay less income tax because of the lower taxable amount

    What you can claim:

    • Loan interest (your biggest deduction)
    • Council rates and water rates
    • Insurance premiums
    • Property management fees
    • Repairs and maintenance
    • Depreciation (through a quantity surveyor report)
    • Strata fees
    • Land tax (if applicable)

    Critical: Only the interest portion of your loan is tax-deductible, not the principal repayments. This is why many investors choose interest-only loans to maximize deductions.

    This is one of the most important strategic decisions you’ll make – and most people get it wrong!

    The smart strategy: Pay down non-deductible debt first.

    Here’s why:

    • Investment loan interest is tax-deductible ✅
    • Credit card interest is NOT tax-deductible ❌
    • Car loan interest is NOT tax-deductible ❌
    • Home loan interest is NOT tax-deductible ❌

    Real example: You have a credit card at 20% interest and an investment loan at 6% interest. Every dollar you put toward the credit card saves you 20% (with no tax benefit). Every dollar toward the investment loan saves you ~4% after tax deductions.

    The right order to pay down debt:

    1. Credit cards first (highest interest, no tax benefit)
    2. Personal/car loans second (high interest, no tax benefit)
    3. Your own home loan third (no tax benefit)
    4. Investment property loan last (tax-deductible, keep on interest-only)

    Why interest-only makes sense:

    • Lower repayments = better cashflow
    • Every dollar you pay is tax-deductible
    • You free up cash to attack expensive non-deductible debt
    • More manageable during vacancy periods

    Important: Once you’ve cleared your non-deductible debt, you can always start paying down the investment loan if you choose. But while you still have credit cards or car loans, paying down your investment property is actually costing you money!

    Talk to your accountant and mortgage broker to create a debt paydown strategy that maximizes your wealth building.

    Disclaimer: This guide provides general information only and doesn’t constitute financial or tax advice. Tax laws can change, and everyone’s situation is different. Always speak with a qualified accountant or tax advisor about your specific circumstances before making any decisions.