Renting out my home - Then renting another

This may seem like a strange thing to do but my wife and I are considering it.

We would like to rent our current home (the only property we own) and then rent in an suburb which we cannot currently afford to buy. The reason we would like to do this is because we plan on eventually buying in this suburb and our first child is nearly 3 so we would like to get settled there before she starts school. This way we don't have to move her half way through.

I have read that CGT only applies after 6 years of renting out the home, so I assume if within this period we can afford a house in the suburb we want to live in we can then sell our home without paying any CGT.

Has anyone else done this or maybe currently doing this?

Are there any other tax implications? Will I need to pay tax if the rent is more than the interest? (Not that I think this will be the case) The different between the rent of our home and the home in the new suburb will be $50-$100 per week more.

We are currently putting an extra $600 per month into our mortgage and our original plan of this thinking was doing this until our daughter is 4 (end of next year) and then buying or renting in then new suburb depending on our financial situation. Obviously this would be better but we would be so much more happier in the new suburb. And isn't that whats more important.

Any help or comments would be grateful.

-Kriso

 

Hi Kriso

As long as you don't have another PPOR you can qualify for the 6 yr ownership rule and not be liable for CGT. The shortfall between your incomings (rent) and outgoings (loan interest, PM fees, insurances etc) will be treated just like any other IP that you own ie: you'll be able to reduce your taxable income by the amount that you've "lost". However, to minimise this you might want to consider getting a depreciation report done on the property when you revert it to an IP.

And, yes, what's important to you in this stage of your life is what counts- especially when you have children
Best of luck with it all!

 

Kriso,
Home ownership as compared to owning an investment property (IP) is expensive in terms of cash flow. You pay far more for a mortgage (unless you have a substantial deposit) than you do paying rent, all else being equal.

For most people, this is the way they should get into the property market.

As you now have your own home (PPOR), I would certainly consider changing your existing loan to an interest only loan with a 100% offset. I would put any surplus funds into the offset rather than the loan itself. The effect is similar in terms of interest cost but the offset savings are yours to use without confusing the ATO regarding future redraws.

Once you 'convert' your PPOR into an IP, interest is deductible as are other property expenses. Get a quantity surveyor to compile a depreciation report and find a good property manager. Consider whose name the title should be in, if you are in Victoria you can 'transfer' the title into your spouses name without incurring stamp duty. Do that before it becomes an IP. The choice will depend on the numbers as to who will best benefit after tax of 'owning' this IP.

These are the things to consider.
Good luck
Greg