Hi All, I've a property in Fitzroy and a P&I loan fixed at 7.35% for the next 4 years. Loan is $600k and LVR should be around 50%, but hard to say given the current climate. I'd really like to turn it into an IO loan and it'd be cash neutral/positive but obviously that is not feasible at this moment due to the credit crunch. I think it best to keep it and refinance when possible but some people are suggesting i sell. I also rent out part of the house which covers 3/5 of the mortgage. Any opinions or insight into my position are most welcome.
Why do you need to do anything ? You haven't actually mentioned what the problem is From what I gather, this is your PPOR that is partially rented out ? Are you declaring the income and claiming any of the interest costs on tax ?
The fixed interest is lower than the variable. You could break the fixed term and shouldn't have break costs but it's not in your interest. I'd leave it as is.
I guess there is no problem really I guess i should be declaring income and claiming expenses. What expenses can i claim and do i apply a 2/3 ratio as i rent out 2/3 of the space. i.e. claim 2/3 of interest, depreciation, expenses. what about rates, insurance etc. can i claim a portion of those as expenses too?
yes, you can claim a portion of all expenses including insurance, cleaning, etc. However, be aware that this will affect the CGT free status of the property when you sell. If you don't ever plan on selling, this may not be an issue - but it's worth taking into account. You'd need to do the sums to work out whether the tax you save now is worth enough to justify the extra CGT you will potentially pay later. Have you read through the ATO's Rental Property guide ? There is a scenario not all that different to yours included: Rental properties 2007-08 ("EXAMPLE 6: Renting out part of a residential property")
thanks - i read through that article. How about this.. If i'm renting part of the house out, declaring the income but not seeking tax exemptions would i have to pay CGT on selling the house? Also, what if in 5 years time i rented the whole house for a further 5 years, claiming expenses and then sold?
If you aren't getting any tax benefit from it (ie not claiming expenses), then I wouldn't be declaring the income in your tax ... just continue as you have been - it's just a non-commercial arrangement between you and some other people ... not uncommon to share a house. You might want to get accounting advice on this though! Provided that you don't have a new PPOR you wish to claim the CGT exemption on when you move out, you can nominate the current property as your PPOR for up to 6 years after you move out - thus maintaining the CGT free status when you sell. You can still declare income / claim expenses in this case - it's only CGT which is affected.
Irrespective of the tax benefit, if you are getting a financial benefit then IMO it should be declared. If it's not declared and one day let's say you have an argument with your tenants and they dob you in you could get in a lot of trouble. cheers
If it is not a commercial arrangement, then there would be no reason to declare/claim anything. The ATO actually covers these types of situations - it is like running a small business in a non-commercial manner, it falls under the category of "hobby" rather than a business for tax purposes. It is not uncommon for people to share a house and share costs. However, there was no mention of the exact relationship between the owner and the "tenants". Are they on a formal fixed term lease agreement for periods of 6-12 months ? Or do they just pay rent in an informal manner (ie not under the terms of a legally binding lease) and contribute towards utilities etc ?
