Here's my situation
We owe $275,000 on our home which is currently fixed interest at 6.4%. This fixed interest period will expire in December this year and we will have to refinance. We own two other IP's that are positively geared with small loans of around $150,000 each on them, also fixed until December. So we are in position where most of our interest payable is on non tax-deductible home loan. When all three loans come off fixed 6.4% at the end of the year, I have calculated we will be up for an extra $10,000 in interest payments if the interest rate is around 9.5% at the time.
Should I rent out our home (for around $350/wk) and rent a similar house for around the same amount, so we can then claim the interest and rates and insurance as a tax deduction? Wouldn't we be better off doing this? Only negative I can think of is that my house would then be liable for CGT but in light of the recent huge growth in my area (Brisbane) and falling prices I would assum Capital Gain would be negligible if not negative in the next 3 years.
Anything else I am not considering? Any comments appreciated.
Employ a valuer to give you a valuation on your primary residence so you have a record of the current market value of your property before you rent it out. Make sure you do not claim interest for the portion of the financial year your house was PPOR. Make sure the loan claimed is directly linked to the property rented out.
Depends on owners marginal tax rate
By renting out the PPOR house you will have expenses of approximately $11,000 and then you need to consider your top marginal tax rate. If you have $11,000 in a tax rate of say for example 30% then you save $3400 in tax and spend $11,000 plus the rent for another house? as opposed to $27,000 in non deductible interest costs for PPOR.Have you thought of moving into one of the two $150,000 loan houses that you can't get a tax rebate on due to be positively geared while interest rates are up and thus saving yourself from paying out rent and being able to transfer the PPOR CGT exemption to the lower loan house and also getting this house re-valued before you do this so you can work out CGT tax in the future if you later sell it or re-rent it out.
I can't give you specific financial advise but rather offer some other possibilities you may not have thought of.
Thanks for your response duckster.
I can't move into either of the other properties as they are in Mount Isa (bought solely as IP's) and I am in Brisbane.
My tax rate will only be 30%.
How do you get the figure $11,000?
See http://www.ato.gov.au/content/downloads/NAT4151_07.pdf page 31 for the records you require
very close to the bottom of the page it states needing the valuation of the house and that the change to income production is a CGT event similair to acquiring a property and this is why a valuation is required.$275,000 at 10% interest is $27,500 minus rent income $350 per week being $18,200 p/a plus approx guess of $2,000 p/a for council rates, insurance, water rates. = $11,300. Factoring in 2 x 0.25% interest rate hikes before this year is up .
Anybody else contemplated or doing this scenario?
Dont forget that you are allowed to classify you current PPOR as such for up to 6 years after you move out and it becomes a rental, PROVIDED you dont buy another PPOR in that time. If you rent then sell your PPOR would not be subject to CGT if it was in that 6 years. As always, check with your accountant.
Mick
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