Westwood Conveyancing

Thinking of renting out your home?

What you need to know before renting out your home

Thinking of converting your home to an investment property one day?

You’re not alone …

In my many decades as a tax specialist, I’ve been asked almost every question, but some are more common than others.

And one of these is:

“My spouse and I are thinking of upgrading our home but want to keep our existing home as an investment.

What are the tax consequences and what can we claim when we convert our home to a rental?

Is it all too hard and is it better to just sell rather than rent it out and reduce our mortgage?”

Bigger picture

This is a very common question, but you need to look at the bigger picture.

If the property is, in fact, a good investment grade property with solid long-term growth and rental upside then it makes sense to keep it if you can.

Wealth creation is all about increasing your asset base not reducing your debt – all other things being equal.

Let’s put some numbers against this scenario

If you have $200,000 equity in the existing home and you sell it you would reduce your non-deductible debt on the new home and save your interest expense by, say, $10,000 annually.

However, if you used it as a deposit on a rental property you could purchase a $850,000 property, which if it grew at 7% on average over 10 years would generate capital growth of $850,000 or $85,000 per annum on average.

Yes, I know property growth is not guaranteed or evenly achieved every single year but, in both Sydney, and Melbourne, the average compound growth was more than 7% over the past 10 years.

And in Brisbane the better performing properties achieved similar growth.

You need time to build your asset base so 10 years should be a minimum and you should at least target average long-term growth rates.

Selection is key

It is therefore critical to purchase good investment grade properties not just any old property. 

What is that old saying: “Anyone can become a property millionaire if they live long enough”?

However, time is also risk so you should buy better performing properties, which you can add value to as well as those that have a level of uniqueness.

In the above example if the home is investment grade then it may be better to hold it, save selling costs and any required maintenance, which could be postponed if rented.

You will also save on purchase fees such as stamp duty, legal costs and associated inspection and buying fees.

The costs of selling your existing principal place of residence and buying a new investment property include the agents commission on sale, stamp duty on the new purchase as well as legal costs on selling and buying.

At the end of the day, your asset base swap – even if you sell and buy at the same gross price – has cost you a significant amount.

In fact, you could have probably gone backwards.

All up, this could save you $85,000 on an $850,000 sell and buy.

I am sure you can find a better use for these funds even if you use this sum as a buffer.

If your goal is to improve your financial position and your asset base using property, it is better to hold your existing home if it is investment grade.

Tax implications

Only the debt on your existing old home will be tax deductible, but additional expenses such as depreciation on the building (note recent changes to fixtures and fittings depreciation loss), rates, repairs, insurance etc. can also be deducted.

The tax consequences will be dependent on whose name the property is held.

If jointly held, then the profit or loss will be divided 50/50.

If any new debt is incurred to complete a renovation, then this debt will also be deductible.

Monies borrowed for the new home will not be deductible even if the previous home is used as security.

Deductibility of the interest is dependent on the purpose of the loan and not on the security for the loan.

Property investors need to know about finance, tax and the law (good name for a book that one).

The Australian Tax Office keeps an eye on investment property claims so be careful but do claim all your legitimate expenses.

Wealth creation is all about growing, protecting and passing on your wealth.

So, the key is to build a solid asset base and then reap the rewards over time.

SOURCE  :  https://propertyupdate.com.au/what-you-need-to-know-before-renting-out-your-home/

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