Rules for living in a property

You said you were married – If you are married you are one entity as far as owner occupied goes.
So the house you live in is deemed as your main dwelling.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36883.htm
This is for capital gains tax exemption.
So if your husband  sold your husband's property he doesn't have to pay capital gains tax.
Now you can only have one house at a time deemed through living in it as a main residence.
However there is a six year rule where a previous main residence can be held as a main residence even though you moved out of it and rented it out. However you still can only claim one house at a time as your main residence so the other house would be deemed as capital gain taxable.

Yes you must be able to prove that you live there
The tax department will only let a married couple have one house treated as their main residence.
http://www.ato.gov.au/individuals/content.asp?doc=/content/36893.htm
unless they own 50 % then the ATO might treat both houses to 50% main residence exemption
If you do not live in the house you can't get the capital gains tax exemption and remember you can only claim one house at a time so the ATO can get their tax from your property one way or the other.
It is up to the tax payer to prove to the ATO that they lived in the property
The implications are that if you sell your investment property at this stage in tax law that if owned for >12 months you get a 50% reduction in your capital gain.
The gain is then added to any other assessable income the property owner has and then tax is worked out. So you could if say marginal tax rate worked out to 40% dividing the gain by 2 for discount be paying 20% Capital Gain Tax on the increase in value of your property.

Your friends are most likely thinking of the first home owners grant which because you are married you most likely can't apply for as you (married entity) already own a property and if owned before the year 2000 then you definitely can't claim FHOG.
there was a loop hold where you could buy a house in some states of OZ and rent it out after year 2000 and still be able to apply for FHOG as you had never lived in your property on the next property you decided to live in.
To get the FHOG there was a requirement to live in it for 6 months in the first 12 month period to be elligible.
Now on the point of moving into the investment property get a valuation done on the investment property and the property your husband owns to make working out future capital gains tax as you will have a good record of the values.
When you both leave husband's house – you could sell it but if you don't sell it the valuation on it sets the cost base for when it changed to an investment property to work out future capital gains tax.
You can pro rata by time – like owned as main residence for 7 years owned as investment for 5 years so 7/12th is main residence exempt and 5/12th of the gain is capital gains tax liable.
But a valuation is more accurate.
With you investment property when you move in the valuation works out what part is capital gains tax liable and what starting value is capital tax exempt. If you sell it anytime in the future.
Its for record keeping requirement and protects you in the future when trying to work out capital gains tax.

Not sure if its in 101 english.

I am sorry in advance if what I am commenting on below in this matter of fact simple english comment on the unthinkable as it might cause you or your husband any offense in anyway but it is important to think about and even discuss this with your husband for asset protection planning.

Reading between the lines of your last statement.
Your husband will not be involved in my property purchase. If your husband is not contributing to the repayments and running costs of your investment you need to discuss this point with your husband.

You may need to consider protecting your investment in the improbable event of marriage breakdown. I am not saying you will be having this occur but you need to protect or consider what the implications can be if it were to happened.
(similar to Life insurance no one likes to consider it or talk about it )

If you have paid for all the costs and it's in your name you would have to pay your Spouse Half of your investment value. If you are forced due to this to sell you could be paying capital gains tax not your Spouse. Then with what's left over you then have to pay half of what the sale proceed were to your spouse.
I know it is not romantic and most people don't want to even think about it but there is a way of protecting this investment if you are the sole expenses contributor.
http://www.law4u.com.au/cgi-bin/factsheet_frameset.asp?article_id=479
http://www.legalaid.qld.gov.au/Legal+Information/Relationships+and+children/Property+-+married+and+de+facto/Property+and+financial+agreements.htm
http://www.financialagreements.com.au/separation-agreement.html
I am assuming that the statement you made may be along this line of thinking when reading between the lines.

I am sorry in advance if this matter of fact simple english comment on the unthinkable has caused any offense to you in anyway but it is important to think about and even discuss this with your husband for asset protection planning.

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Really informative post duckster – I think many people will benefit from it