Purchasing a property that has tenants can be a great proposition for a property investor, but what happens if you are seeking a principal place of residence and the home you want to buy is tenanted? Buying a house with tenants brings a few financial implications for first home buyers and non-first home buyers that you should be aware of prior to making your offer.
What are the tax implications for buying a tenanted house?
If the house you buy or are hoping to buy currently has tenants you should confirm with the agent that they will vacate the property by the time settlement takes place. If the tenants do not move out and they continue to rent the property (off you, as the new owner) it will trigger a Capital Gains Event, which means you will automatically be liable to pay Capital Gains Tax if you sell the home in the future.
How will first home buyers be affected if they buy a tenanted house?
First home buyers beware! If you take advantage of first home buyer benefits, including the waiving of stamp duty or concessional stamp duty, and your property is tenanted for more than 6 months from the settlement date, you will lose your owner occupier stamp duty concession. Further, since settlement has already taken place you will be liable to ‘pay back’ the amount, meaning you may need to find up to $10,000 simply for buying a tenanted property.
If the property you wish to buy is currently tenanted you should check when the lease runs out and ensure that you will be able to take vacant possession of the home at settlement (or very shortly thereafter) so you are not penalised.
What other costs may be involved with buying a tenanted property?
If you plan on moving in to a tenanted property you should ascertain the type of lease the tenants are bound by before agreeing to buy. If the lease agreement between the current owner and existing tenants is a periodic one (i.e., month to month) the owner may inform the tenants of their intention to sell / your intention to move in and the transaction can continue seamlessly. If, however, the lease agreement is fixed term in nature, you may find yourself having to bargain with the tenants to break their lease. In order to persuade the tenants to vacate early, you may offer to pay the tenants’ moving costs, bond or first month’s rent at their new home or provide some other cash incentives to compensate for the inconvenience of breaking their lease. Either way, you have the right to know which type of lease agreement the tenants and vendor have as part of your due diligence when seeking to buy the property.
Additionally, as a prospective landlord, it’s essential to inspect the property to ensure it meets safety standards and provides a secure and habitable environment for tenants. This aligns with your legal obligation to uphold a ‘duty of care’ by maintaining the property and addressing potential safety hazards, ensuring the home remains a safe and comfortable place to live in exchange for rent. By addressing these aspects during your due diligence, you can avoid potential accidents and foster a positive relationship with your tenants.
