Dilemma - Sell or Rent out My First Home

Lashikk on 15/03/2016 - 11:01
Last edited 15/03/2016 - 13:27 by 1 other user

Hello dear Ozbargainers.

I've no experience/information on this, so hoping to get some info before I see an accountant.

Here's my situation:

Townhouse is first home for 10 years, had about $30000 left to pay the bank but took out 95% of the total bank valuation of the TH 2 years ago and put money into New House to built. Now Just finished building a new house which I'll be moving into by next month.And was thinking of renting out the TH.

My question is should I sell the TH and buy another one to Negative gear. Or keep TH, rent out and go as Positive gearing hoping to get the capital gain in coming years and pay extra tax on rental income. Rental income would be $360-$400/week. Will I be able to claim the interest paid on the loan with ATO after it generates the rental income as it will be my IP?

According to my research so far if I don't declare the new house as my PPOR for 6 years from the day I move out from TH , I don't have to pay CGT. is this correct?
If I do that what happens when I sell the new house say in 10 years from now?
Hope the question made sense.

Thank you all in advance for your insight.

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  AJW on 15/03/2016 - 11:27

  +1

  I don't know the legalities of this, but if your main place of residence turns into a rental, then you need a valuation to determine the CGT that you would pay after this date onwards. If the valuation is very generous, then this will lower future CGT. To be honest, if the negative gearing laws change they won't be for the better for investors, and existing properties might be grandfathered on their current negative gearing laws. You've also got to take into account the cost of buying and selling - which might be another (I don't know) $20-40k that you wouldn't incur if you kept it.

  If you thought you could get a better suited investment property that would make more long term profit than your current house would as an investment property then go for it. Is your current house potentially a good rental property? Low maintenance etc..

  • 

    ashikk on 15/03/2016 - 13:05

    Apart from leaky taps and strata fees there isn't any AFAIK. Around $1000 in interest, need to spend around 5k to fix the TH. Will get around 370-400 on rent. Strata fee is $475 a quarter. Don't know whether I need pay for water or not. Paid 200k for it and I'm hoping to get 350k now if I sell it. What would u suggest? I'm open to all ideas.

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  Smulder on 15/03/2016 - 11:36

  +3

  Unfortunately you won't be able to claim the interest on the loan as a deduction to your rental income. The loan funds were used to buy your new house. As the new house is not earning income, the interest on the loan is not connected to any income, and is therefore not deductible. It does not matter that the original loan was taken out on the (now) investment property, or that the investment property was used as security. The ATO only looks at what the funds were used for.

  If you move out of your townhouse and rent it out, you can continue to elect it as your main residence for 6 years, and therefore if you sell it within those 6 years, pay no CGT on that property. If you rent it out for more than 6 years, CGT will then apply.

  You can only nominate one property as your main residence at a time. If you elect to have your townhouse as your main residence, then your new house cannot be your main residence. This means that it is not exempt from CGT while it is not your main residence. When you come to sell it in 10 years, you will not get a full exemption from CGT, and will need to apportion the CGT for the number of days it was not your main residence.

  From a tax deductibility point of view, you could sell your townhouse and use those funds to pay off the loan for your new house, then treat your new house as your main residence. That was there is no CGT to pay on either property. If you then take out a new loan to buy a new investment property, the interest on that loan will be deductible against the rental income. CGT will apply on the new property however. But there are many more considerations than just interest deductibility as to whether you should sell your townhouse and you should expert advice. Costly mistakes can be made if you do things incorrectly.

  Hope that helps

  • 

    ashikk on 15/03/2016 - 13:06

    Thank you for the info.

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  JetLi on 15/03/2016 - 13:05

  So what's the loan amount on your new house and on your TH?

  • 

    ashikk on 17/03/2016 - 10:48

    $600k and $333k.

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  Euphemistic on 16/03/2016 - 14:37

  +1

  I think I would sell the townhouse. No CGT (no question) and the interest you will be able to claim is very low as it is near paid off, other expenses can be claimable of course. Once it is sold you could buy another investment property to claim the additional interest payments.

  We moved last year and worked out it was better for us to sell the house we were in (principle residence). If we hadn't sold we would be paying a lot of interest on our new house. Our old house had no loan on it, so would have had no claimable interest payments at all. We were able to take the capital gain on the old house tax free as well. As it now turns out we have a small-ish loan on the principle residence which we will pay off ASAP and then focus on our other investment property and work out where to invest later.

  • 

    ashikk on 17/03/2016 - 10:47

    Thank you for information.
    I'm leaning towards selling it. It doesn't make sense to pay unnecessary tax on rental income and pay additional interest which cannot be claimed on tax. When I sell it I'll have an equity of ~350k on new house and can be used to pay minimum deposit to buy IP in near future.