I asked this question in a different forum, but got confused on who was repling to me.
A friend of mine moved out of his family home and moved into a new house. He kept his first home and rented it out when he moved into his new home. He has been negative gearing the first property since moving out. I said this is not right and he may get hit by the ATO if he gets audited. Can som on let me know what the go is here?
it all depends on what interest he is claiming against the rent on that property he moved out of.. he cannot claim interest on loans used to construct the new property which he is now living in, even if those loans are secured against his original PPOR.
If you friend is negatively gearing their first home they will not be hit with ATO taxes in fact he will be able to make tax claims against his own income he is producing now, meaning less tax to pay and more to gain for himself. eg. Income from rent pa is say $15,000 and his expenses are $20,000 he has already made a loss of $5,000, once the accountant works other expenses into the equation they will make more of a loss and make more money from the taxes, which means the tax people will owe him back. I would highly recommend them seeing an accountant who would lead them in the right direction which they can claim as an investment expense, also to get a depreciation schedule on their property cost $400-$500 which again they can claim in their expenses plus the extra depreciation on their property from the schedule written.
Hope this helps.
HI, Upon reading your question again, and Mr5o1 answer. He can only claim mortgage interest (only the interest) which was on the original purchase loan of their first house which they are now renting out, if he has taken personal loans against this property for anything he can not claim these as mortgage interest expenses against his rental property. He would only be able to claim any extra mortgage interest if the money borrowed against this house is used for this house, renovations, upgrade etc, but he would have to have written statements to prove the money borrowed was to pay for work done on rental property and not for personal use. Again tell them to see an accountant, some accountants offer free consultations.
Thanks Mr501 and KCM for your comments.
Just so I can be clear, I thought you could only negative gear a loan on a property if the loan is for investment purposes at the outset (has to do with intent at time loan is taken) and the property is likely to make a positive return at some time in the future. I did not think you could negative gear the loan on your PPOR (I think acronym for principal place of residence ie your family home? sorry if i'm a bit behind the lingo) – even if you move out and then rent it out later on. To keep it simple, let's assume there is no second property bought and he has not altered the loan at all, you just now own one house and are renting it out, after previously using it as your family home.
Hope i'm being clear
Chears Terry
Hi Terry,
If he moves out of his home (PPOR), and rents it, then it becomes an investment for tax purposes. If he has moved into a new home he has bought, then this new home is his PPOR, and the old home becomes an investment property.
The character of a property can change, and is dependent on what the owner/s are doing with the property.
They are well within their rights to negative gear this property, the big mistake I see is that people try to claim an increased loan amount- this is where the ATO will crack down on your friend. i.e. the max. allowable tax deduction is on the original amount drawn down. This is why most of my clients are on i/o for their PPOR whilst pouring money into their offset acct.
"He kept his first home and rented it out when he moved into his new home. He has been negative gearing the first property since moving out" yes he can negative gear this property , the loan does not have to be "for investment at the outset"
Peoples circumsances change as well as their asset position.
Assuming that your friend has not increased the loan from original property to help purchase his new property or anything else, as well as the rent on that property is at "market rates" then the normal investment guidelines apply. As previously mentioned your friend needs to get a schedule done for depreciation, from a quantitative surveyor to maximise his non cash decuctions.your friend cannot claim the interest associated with any loan or loan increase for the new property where he lives as his principle place of residence.
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