My situation is I want to move interstate ASAP & I’ve had my PPoR (inner city Sydney apartment) on the market to sell for the last 2 months. After an initial flurry of interest (including an accepted offer which then fell over) things have gone dead quiet.
I am contemplating whether to just rent my PPoR out so I can just make the move interstate (& given rents here are currently strong) & then try & sell in a year or so down the track once the market has picked up rather than just slashing the price to sell it quickly now. I am trying to understand the implications of if I do rent it out.
I understand there’s a 6 year rule which would mean provided I sell within 6 years of renting it out & providing I haven’t already bought another PPoR (ie, I’m intending to rent initially after I move) then the sale will be CGT free. Is this correct?
Will all maintenance costs & strata levies be tax deductible once I rent it out? Also will interest paid on mortgage also be theoretically tax deductible? The reason I ask ‘theoretically’ is I believe I may have inadvertently removed that option: I redrew most of the extra repayments I had made on my mortgage because I was expecting to sell imminently & therefore figured the whole mortgage would be paid down once that happened so I might as well put my extra payments to work in ahigh interest account.
Does this mean there is NO WAY I can now make ANY of my interest payments deductible if I rent it out? Is there anyway around this? If I’d just invested those extra payments elsewhere in the first place I wouldn’t have this problem…
Thanks in advance for any advice!
Hi
I am not an accoutant, but think you are correct on the 6 year rule. Once your property is rented out, or even while you are trying to rent it, I think all expenses should be deductible.
It is a bit more tricky with the interest on the loan tho. When you pull money out, this is classes as reborrowings and the interest is only deductible if the funds were used for investment purposes. Better check this with your accountant.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Hello LucyofOz
"The reason I ask ‘theoretically’ is I believe I may have inadvertently removed that option: I redrew most of the extra repayments I had made on my mortgage because I was expecting to sell imminently & therefore figured the whole mortgage would be paid down once that happened so I might as well put my extra payments to work in ahigh interest account.
Does this mean there is NO WAY I can now make ANY of my interest payments deductible if I rent it out? Is there anyway around this?"
Surely at least part of the interest will be tax deductible.
Lets say loan $200K
Extra payments which you redrew $40K
This will still leave you interest on $160K to deduct I should think.If you want to deduct the interest on the part you redrew as well you could always put it into another investment…. for example blue chip shares. As Terry advised speak to your accountant.
" If I’d just invested those extra payments elsewhere in the first place I wouldn’t have this problem…"Or if you had just put these extra payments into an 100% offset account linked to your mortgage you would have had the same effect (i.e paid less interest) and still not had this problem when you moved the funds out of the offset account so as to be able to claim the interest on the full mortgage. I love offset accounts.
BTW Unless you have a fixed interest loan taken out when the rates were very low, I can't think of an account that will pay you a better interest rate than that you are paying on your mortgage. Add to that the fact that you will pay tax on the interest earned ( in this new account ) without getting a tax deduction for the extra interest you pay on the mortgage while you are trying to sell the house, this seems like a not so good idea, unless I am much mistaken.
Cheers
ElkaIf your redrawn money has been invested then it should all be tax deductible.
Just ensure than none was used for private expenses – just investment usage.
Thanks for the replies so far – much appreciated!
Terryw wrote:I am not an accoutant, but think you are correct on the 6 year rule. Once your property is rented out, or even while you are trying to rent it, I think all expenses should be deductible.Great! Good to know TerryW.
elkam wrote:
Or if you had just put these extra payments into an 100% offset account linked to your mortgage you would have had the same effect (i.e paid less interest) and still not had this problem when you moved the funds out of the offset account so as to be able to claim the interest on the full mortgage. I love offset accounts.In hindsight Elka, I really wish I did look into getting an offset account when I got my mortgage – at the time I thought I was best sticking with something vanilla & easy to understand.
elkam wrote:
BTW Unless you have a fixed interest loan taken out when the rates were very low, I can't think of an account that will pay you a better interest rate than that you are paying on your mortgage. Add to that the fact that you will pay tax on the interest earned ( in this new account ) without getting a tax deduction for the extra interest you pay on the mortgage while you are trying to sell the house, this seems like a not so good idea, unless I am much mistaken.You are of course absolutely right – I'm very much thinking this was a 'Doh!' moment of mine!
Mortgage Hunter wrote:If your redrawn money has been invested then it should all be tax deductible.Just ensure than none was used for private expenses – just investment usage.
I didn't realise that Simon – I'm just planning on leaving the funds in the ING account until I'm ready to buy a new PPoR (by which time I would have sold the current PPoR). So would that maybe count as being for 'investment usage'? I'm assuming not & that it has to be something where theres potential for capital gain/loss.
One more question: What if I just reversed the redraw & put the same amount of funds back on my mortgage again? Does that mean it could then be all tax deductible?
Thanks again!
Hello LucyofOz
"One more question: What if I just reversed the redraw & put the same amount of funds back on my mortgage again? Does that mean it could then be all tax deductible?"
It makes no difference to the deductible interest. It will however save you some non deductible interest being the difference between what you get for that money in the ING account (less the tax you pay on this) and what you pay for that money on your mortgage.
I don't really think this should be your main consideration when deciding on what to do with your appartment. Personally, and this is only my opinion, unless you have something better you want to do with the money I would rent it out. As you say, rents are strong at the moment and you have a chance of capital gain.
The main consideration would be how much out of pocket will you be each week as I assume it will be negitively geared.
Cheers
ElkaThanks Elka, much appreciated.
I was initially hoping to buy a new PPoR perhaps 6-12 months after moving interstate but if I rent out my current place then thats unlikely to happen in which case I won't have any needs for the funds any time soon.
So might I be better off putting most of my funds back on the mortgage & refinance it to reflect the lower loan amount so my monthly payments will at least be lower & more closely matched to the rent I'll be expecting? (ie, my current monthly payments are still based on the size of the loan i first took out (80%) where as I've since been able to pay off an additional 15% in extra payments)
Does that make sense maybe?
Hello Lucy
Nicely done. 15% shows a good saving habit though of cause I don't know over how many years.
Yes renegotiating your loan would help you reduce your repayments but then naturally your "redraw money" would no longer be available to be redrawn again. Also changing it froma PI loan (principle and interest) to an IO loan will also help in this. An 100% offset account where you deposit all your wages, linked to this morgage, would also be a good idea. It would not reduce your repayments but it would reduce your interest so effectively you would be repaying some principle each time. At the same time the savings in this account would be usable for whatever you want.
You should also get a depreciation schedule drawn up, specially if your appartment is not very old, as this will help you reduce the out of pocket cost of keeping your appartment. Also a good accountant.
What you should do is all a bit dependent on what your goals are for the future. Are you interested in being a property investor? Are you interested in trying to keep this appartment and still buying another property in the future? If so, you should not tie up the "redraw money" as this could be the start of a deposit for another property, whether another IP or PPOR.
I don't know which lender you are with or what, if any charges/penalties would be associated with changes to your mortgage. Maybe a good mortgage broker, who is also at home with investing, may be able to help you structure your loan correctly for the future and reduce costs of doing so. Certainly worth asking your lender and then also consulting a MB. There are some on the forum who would be my choice.
Hope this helps
Elka
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