13/10/2011
Question: My husband and I are thinking of renting out our current PPOR and buy another property to live in. The median rent in our area is currently around $300 per week. We only owe $100,000 from the bank. What tax concessions can we claim when we convert our home to rental? Is it better to just sell rather than rent it out?
Answer: If the property ticks all the boxes as being a good solid long term investment it would make more sense to hang on to it….because the costs of selling and buying a new investment property being agents commission on sale, stamp duty and legal’s on purchasing a new one can be quite expensive…just to end up with a similar asset (and may not be as good as the existing property).
Based on the numbers above your rental should be approx $12,000 net and if you deduct the interest on $100,000 @ say 7% = $7,000 your net positive cash flow would be approx $5,000. On top you may then be entitled to claim depreciation on the building (if built post 1985) or any renovation or improvement work undertaken whilst occupying …..also on the fixtures and fittings.
To maximise this deduction on depreciation I would recommend a quantity surveyors report, the cost of this report is minimal compared to the benefits obtained. Assuming you will get some form of benefit from depreciation the net tax position would be minimal and you would have reasonable cash flow…being approx $5,000. I would also convert my $100K loan on this now investment property to interest only so to maintain the tax benefits and I would ensure you increase your principle repayments on the new loan for your new PPOR which will not be tax deductible.
On top of the depreciation you will be able to claim tax concessions on all costs associated with maintaining this property such as rates, repairs and maintenance, agent fees, travel if required and other sundry expenses.
Question answered by David Naylor, Chan & Naylor (www.chan-naylor.com.au)
