- Hi, folks
What are the tax implications of renting out a property that I own full equity in? I'm thinking of selling it to help reduce the mortgage of a new property I've just purchased, but I have a dilemma whether it's best to rent it or to sell.
Any straightforward advice (with jargon explained!) would be most helpful.
Thanks
CarolHi,
I've just been through a similar process.
We own our PPOR outright, and are buying another PPOR. We are taking a deposit from our current home until we move. We had planned to rent our original PPOR but of course the interest is not deductible, so its just simpler to sell, move house and use the proceeds to grab another couple of IPs
The rental income would be more than your expenses thus making the rental income taxable income. Also for the period you rent out the property you would lose the PPOR (Primary Place of Residence) tax exemption for Capital Gains Tax (if you live somewhere else as you can only claim PPOR at one house at a time). This means any capital gain made during the rental period is taxable and this causes headaches with working out what market value the house was at the start of the renting period.
One implication is you will be positive geared and paying tax while you are paying large amounts of non-deductible interest on the new one. Some people sell to enable them to move the proceeds to the new home, and then buy again borrowing to buy another investment property. Implications are: Agents fees, Stamp duty on the new IP purchase, loan fees, govt charges etc.
If your current property is a good one and you wish to keep it, you could consider selling to your spouse or even to your own trust. This may enable you shift deductibility and you get the keep the property – and avoid the agents fees.
Please note you could still claim the old house as your main residence for up to 6 years while you are not living in it. You can only claim one residence as the main residence, but you would have a choice of the old or the new and this choice would only need to be made during the year you lodge the tax return of the sale. An example of why you may elect to keep the old on as the main residence is this may have been growing much fast than the new old = more of a capital gain.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I would love to set up a trust
I went through the build your own family trust process on http://www.lawcentral.com.au ($275.00), assuming I set one up, how do I actually use it?
Assume I sell my current PPOR to the trust which would be a CF+ property, am I now able to claim the interest against it (The debt against this property has been used to butya new PPOR, so it would not normally be tax deductible).. what other benefits are there?
or, should I just my accountant and not ask a ton of questions here
Cheers
Just think of the trust as another person. The trust buys the property and takes out a loan to do so. The money released goes to you to be used as you like. The trust can claim the interest and other costs as it is investment related. If the rent received is greater than the expenses, then the property would be positive cashflow and the income could be distributed to various beneficiaries at the end of the financial year – at the discretion of the trustee.
You should talk to an accountant in conjunction with a mortgage broker as you need to work out who will be the trustee, appointor, named beneficiaries etc. All of these have implications for tax and loan issues.
Also be aware that trusts cannot distribute losses and you may pay a bit more land tax.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
pwinne wrote:Hi,I've just been through a similar process.
We own our PPOR outright, and are buying another PPOR. We are taking a deposit from our current home until we move. We had planned to rent our original PPOR but of course the interest is not deductible, so its just simpler to sell, move house and use the proceeds to grab another couple of IPs
However, you are deriving income which you can then use to make the new repayments. I think perhaps some number crunching is in order, AND lets not forget CG…
Thanks for the responses.
chatting with my accountant today
Cheers
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