Hi all
I need some advice on a situation and would appreciate anyone's thoughts. We have recently puchased a house that settles in August that we intend on using as our PPOR. The sellers are currently living in the property and would like to rent back the house until the house they are building is completed. We are currently renting as well on a month by month agreement paying $400 per week. I can see a benefit in renting back to the sellers as it allows us to increase our savings that will eventually offset the (very large) mortgage.
The questions that are going through my mind are:
– Will there be any issues if we sell the place in the future, ie not CGT exempt? What if they move out within a year?
– What rent should we be charging? I'm assuming not market rate but something higher because of the benefitting circumstances for the seller?
– Can capital improvements be depreciated for the time they reside?
– Should we manage the property ourselves or use the selling agent as the go between?
– What are the other benefits & disadvantages with such an arrangement?
Thanks in advance. I appreciate your advice.
COG
First of all, you would do better financially to keep on renting and use the new PPoR as an I.P forever!
But of course, you don't want to do that, so to answer these questions;
1. You only pay CGT on the period you use the PPoR as an I.P, if they move out within a year you can then give 1 months notice where you are and move into the new place.
2. Just charge them the market rent; you don't want to piss them off and create a disgruntled tenant from day one. It could cost you more in the long run. Any of the local agents can tell you what rent you should be charging.
3. Yes, you can depreciate cap improvements, and you can also depreciate the building and fixtures if it was built after 1987, but these numbers get added back onto the cap gain at sale time and will increase your CGT. Not a big deal in my opinion; especially if you keep the house for a very long time, rent it out for a short time, and become wealthy through investing. Minor detail.
4. Unless you live close by, know the tenants VERY well, and are really strapped for cashflow; never self manage. The cost is minimal, tax deductible, and frees up your time and relieves you of stress – it's worth every cent if the Manager is a good one.
5. It is mostly a benefit to do this, unless the tenants cause problems. Make sure you take out Landlord's Insurance as well – $200 per year approx and tax deductible.
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