Leasing my existing home so I can rent elsewhere

Mitchel on 14/01/2017 - 15:31

Greetings,
I will be making an appointment to see my accountant next week, but in the spirit of OzBargain I thought I'd ask for opinions here first. You know, for free advice.

Any input would be appreciated as it will give me extra ideas to work with.

The situation
I have a two bedroom unit which I own outright in my name.
We are a family of four with two growing boys who need to have their own rooms.
I would like to keep the current unit for sentimental reasons as well as avoiding fees & taxes when selling

What we want
To lease the current unit to tenants
To rent another, larger, home for the family
To not pay income tax on the rental income
To receive (say) $600 / week in rent and put that towards (say) $750 / week rent on a larger home, resulting in an expense of (about) $150 / week.

What we don't want
If I receive (say) $600 / week in rent to have $200 go to tax, resulting in an expense of (about) $350 / week.

I know that there are other expenses like strata, rates etc that my existing property will require. For my question, my main concern is income tax.

Thanks heaps!

Financial

Comments

  • mbck on 14/01/2017 - 16:29

    Pretty sure you get cgt exemption especially since its your primary place of residence

  • Skramit on 14/01/2017 - 16:32
    +1

    You're kinda doing it wrong. See most people in your situation would negatively gear to buy a new place not rent, meaning get a loan, then the interest on that loan is a tax deduction as it's an investment. That then offsets the tax payable from the rental income.

    For your old property, owning then renting that out, you have to pay tax on all that income. And then if you're just renting your new place…. well…. you can;t really tax minimize with this strategy.

  • Oz80085 on 14/01/2017 - 17:30
    +8

    If you really want to retain the property (sentimental reasons is never a good reason to hold on to an investment. Better to keep emotions out of investing altogether), then you can rent it out for 6 years before it becomes liable for capital gains tax. See the six year rule here: http://www.yourinvestmentpropertymag.com.au/tax-questions/si…

    Don't get too hung up on negative gearing. Negative gearing is essentially just a discount on your loss. Personally I would rather be making money on my investments. In any case, because you have paid down the mortgage on your PPOR to zero (congratulations!), there is no way that you could negative gear it. You can't just arbitrarily increase the debt against the property for the sake of a tax break. The ATO looks at the purpose of the extra borrowing and doesn't allow it to be deducted.

    Alternatively, you could sell the PPOR, buy an investment property (borrow from the bank) and then rent yourself. That way, the interest payable would be deductible and you could negative gear it. However, that still means that the property is costing you money. The shortfall is coming out of your pocket every month, meaning it impacts your lifestyle. You may be okay with this, but it's certainly not going to help you pay the rent.

    Depending on how much your property is worth, you may even be able to buy two investment properties… 20% down on each. I would be looking for positive cash flow properties though, or at the very least, close to neutral.

    Anyway that's my two cents.

    • itajac on 14/01/2017 - 18:45
      +2

      A very educated and informed 2c.The OP would do well to listen to your advice.

  • chazfg on 14/01/2017 - 18:06
    +1

    You will have to pay tax on the rent you receive if you want the money to go straight to you.

    To NOT pay tax on the rent you receive, you probably need to consider
    1. Self-manage and deal in cash. It's not uncommon, but it's tax avoidance
    2. Change your tax structure (i.e. trust and company) - ask your accountant, but the initial outlay will be huge
    3. Purchase another IP and use the rent you receive to cover for the expenses

  • Peck on 14/01/2017 - 18:20
    +1

    Just off the top of my head (But I easily could be wrong) if/when you sell you current unit, you will pay capital gains tax on your current unit unless you move back in under a year. The cgt would be pro-rata on a ratio of how many years you lived there vs how many years you rented it out. Considering that the capital growth is likely to have been very high over recent years, and unlikely to be such in future years, then you lose under the pro-rate deal!
    You new rental is not tax deductible.
    I would sell it and buy a bigger and more suitable residence.

    • Oz80085 on 15/01/2017 - 06:14
      +1

      You have six years in which you can rent out your principal place of residence and avoid capital gains tax. This only applies if you don't elect a new PPOR within that time.

  • thiosuxtube on 14/01/2017 - 19:35
    -2

    I own three houses, am letting two, renovating another and renting in a fourth.

    The only way I can see that you can avoid paying tax on the rental income is to negatively gear the property.

    Take out an interest-only mortgage against the unit that you own. The interest payments, from the date that the property is first advertised for lease, are a taxable expense. Other expenses such as rates, strata, water (connection, not use) etc. are also taxable. Often (as is the case with my properties), the expenses approximate the income generated. If at the end of the financial year, the net income is $1,000 then that is taxed at your respective rate. It if is -$1,000 then your taxable income falls by $1,000 and you save on paying the income tax you would have had to pay for that income at your respective rate.

    Negative gearing isn't the golden egg like it was made out to be at the last election. It just helps offset costs.

    Of course, once you have borrowed money against your unit, the next question is what to do with that money?

    My suggestion would be to purchase the property that you intend to live in next. This, coupled with a series of unplanned moves to completely different towns for work, is how I ended up with so many properties in the first place. Your investment property will be negatively geared, and your new home will have a substantial amount of debt paid off, so the mortgage repayments will be substantially less than the rent you would have paid.

    A dollar saved is a dollar earned - except that the tax man can't have his share of it.

    • thechemist on 14/01/2017 - 21:21
      +3

      Tax deduction is always based on what the loan money is used for not what asset is used to secure it.

      If OP takes a mortgage on a house that has already been owned outright the interest will not be deductible against rental income (your accountant should know and if not then get another one). It is what he does with the money that makes it tax deductible. If he re-mortgaged his house and used the money to buy shares then that amount will be tax deductible.

      Sentiment is going to cost you but at least you can rent it out for 6 years from the day you move out and still claim the full CGT exemption as long as you don't buy another primary residence in the mean time

      Don't know you financial info or location so can't offer any more advice

    • Oz80085 on 15/01/2017 - 06:00
      +3

      If he borrows against the unit that is already fully paid off, he will not be able to claim a deduction on the interest unless the borrowing is for the purpose of acquiring more income producing assets. If that money is used for personal reasons, i.e not another investment property, he will not be able to claim it. That's why offset accounts are such a great idea. You can pay off your loan without paying off your loan :)

Login or Join to leave a comment
Login Join