Hi all, I am considering biting the (hard) bullet and buy my first property.
My plan is to get a double bedroom flat with ensuite (i.e. 2 beds, 2 bathrooms) to live in the place and sublet the ensuite part of the unit (bed + bathroom). Roughly. 50% of the flat would be for my personal usage and the rest would be sublet.
My question is: is this going to have implications on the first home incentive scheme? Would it be possible to gear on the rent?
Thank you all!
Is this flat a 2 bed 1 bathroom?
If you rent out the main bed with ensuite exclusively, what will you use?
Sorry for the confusion. What I mean is: I want to buy a 2beds 2 bathrooms unit and sublet the portion of the flat made of the bed connected to one of the bathrooms and the bathroom.
You want to sublet the bedroom with an ensuite?
yes!
If you are the owner who would hold the head lease?
Yes you can. Just pretend his your mate and keep the money with you. Like a kid paying few dollars to mama for the groceries and free rent.
win
Remember, mama never declares it as an income. Again, he is your mate "sharing for groceries".
is this going to have implications on the first home incentive scheme?
Shouldn't matter. Once you get the incentives, generally you just need to live there for 6 months.
Would it be possible to gear on the rent?
Sure, but remember you also open yourself up to capital gains tax on half the property as a result.
let me see if I understand. Let's suppose a monthly mortgage repayment of $1000. I earn an income of $2000 per month in some random job and sublease the ensuite for $500 (numbers made up for convenience). Pure gearing would mean that each month I can deduct $500 from my $2500 income: is that right? How does the capital gains tax enter in the equation?
You can only deduct the interest portion of your mortgage repayments, and annual income/cost would be where you look at it in terms of tax (at least the first year, then you might be able to ask to reduce your PAYG tax) but that's basically right. On your tax return you'd report $2k salary, $500 rental income, $1k rental expenses and an overall net income of $1,500. So you'd pay less tax overall.
Capital gains enters in because your house is no longer just your house, 50% of it is an income generating asset. So you get to deduct those losses each year but you also have to pay tax on the increase in value. So say you buy the apartment for $500k and later on sell it for $1m. If you were renting out 50% of the property the entire time, that means you're only eligible for 50% of the capital gains exemption on the primary residence. So you have a $500k gain, you'd have a taxable capital gain of $250k (so paying tax on $125k, because CGT is at 50% of the gain). That is likely to offset all the negative gearing deductions you've made over the years.
Even if you have renters for a period of time (let's say you boot them out after 2 years and take over the house for yourself), you need to get the market value of the property when it changed to being 100% your principal residence and, when you sell it, pay the portion of the capital gain from when it was being rented out. So if it's worth $500k when renters move in and $700k when you boot them out, there's a $200k gain and a $100k taxable capital gain.
They don't give you something for nothing when negative gearing.
excellent explanation, tattooed on my arm, thanks. What you are saying is that by renting the house out while I live in I reduce my mortgage costs on a per monthly-basis but I generate a higher taxation shock later in time with a trade-off between mortgage affordability (now) and capital gains (later), correct?
@arkhos: Exactly. As mentioned you're probably best off just quietly taking the cash. Particularly as with insanely high rents at the moment and if interest rates drop in the next couple of years, the tax benefits now might be pretty small. But the capital gains later is pretty much a sure thing.
@freefall101: Whilst I encourage this from the perspective of a "mate" the ATO has really good tracking systems now which means they'll likely know regardless.
If you take cash, make sure the person doesn't have a need to change their address to yours in a formal setting (licence) because that will get captured.
@JDMcarfan: Story for context:
Had family member give a room to a best friend in need for a couple of years as they established their feet (recent refugee) and charged no rent.
As this friend had their licence (and likely ATO address) as my family member's home address, he recently got stung for CGT after selling the place about 12 months ago.
The ATO called up and confirmed that the person lived at the address, despite no formal rental agreement/cash transfer, and thus part of the sale was subject to CGT. ATO wouldn't accept the fact that he was providing emergency accommodation (rent-free) and threatened legal action.
After numerous complaints, on the basis that they shouldn't be slugged for doing a good deed, they eventually relented and waived their CGT bill by about 75%, but still left my family member quite a bit out of pocket.
If the same were to happen to you OP, there's no chance the ATO would budge. My family member had plenty of documentation to support their case and had their tax advisor advocating on their behalf to the ATO.
@JDMcarfan: What? How is it any different if someone bought a place and let their GF/BF stay rent-free? I've never heard of anyone in that situation get charged CGT for sharing their place rent-free. Not suggesting you're lying or anything, but I'm genuinely curious how the ATO justify their position.
@bobbified: Not 100% on how other similar situations wouldn’t be picked up, but living with a partner (irrespective of how long for tax purposes) would establish it as a domestic arrangement (not a tax professional but a CA). This would waive the tax reporting and CGT requirements for rental payments between a couple (but likewise prevent interest deductions).
Given my family member was married and living in said property with partner and child, the additional person living there would’ve been an easy flag for the ATO
@JDMcarfan: I used GF/BF to highlight a more extreme end (and you're prob right that maybe they have a name for it).
I guess what I was saying was that I can't imagine there's anything in the tax rules that says that someone is liable for CGT tax (or any other tax for that matter) if they buy a house to live in and then decide to let their friend live in their rent-free (as long as that person isn't receiving income for it) because their friend is going through a rough patch or something..
I mean, I would be tempted to tell the ATO to GTFO of my business. It's my house and I can let anyone live in there that I want (as long as i'm not using it to produce income).
Given my family member was married and living in said property with partner and child, the additional person living there would’ve been an easy flag for the ATO
I'm sure the situation you describe would happen quite a lot - for eg… friends, family or someone close may get foreclosed on their mortgage and they move in with their friends and family for a while without paying rent or anything.
I wonder if anyone else has been in a shitty situation with the ATO for a situation like or similar to this..
@freefall101: @freefall101 I see the logic of your argument and agree with it. However, let's assume perfect oversight from ATO (horror stories down below backing up this idea) and consider the following plan: I wish to live in the place for about 1 year (co-sharing with a tenant) and then move abroad converting the buy in a full investment property. Given the flat's structure, it can easily be converted into two separate environments with only the kitchen in common.
Since the mortgage puts me in a sad condition (it would dangerously erode most of the monthly savings from my $1000 random job lol), subletting now seems like a rational choice in the view of preserving some consumption power. Thoughts?
Just keep it simple. If you want a tenant then just get them to pay you cash or pay the rates etc.
Just rent privately. Negative gearing isn't all it's cracked up to be. For most people, it's a loss of $1 to get $0.30c or so back.
I think you’ve got some terminology wrong. You’re not sub-letting as you’re not a tenant. Sub-letting is when you’re renting a whole place and then rent a portion to someone else.
You’re just renting out space in your apartment.
Be careful with trying to not pay tax on the income. Any renting from you is going to want a ledger/reference for when they move on to get approved for the next rental.
agreed
You want a full time tenant in your bathroom?
I don't think so but you may have to pay tax on the income stream you receive from them.
Also, IANAA