Thinking of renting out your home and buying an investment?

My clients came to me with the following query…

“My spouse and I are thinking of renting out our current Principal Place of Residence 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?”

This is a common question and you need to look at the bigger picture and if the property ticks all the boxes as being a good solid long term investment in real estate it would make more sense to hang on to it and not to sell….The following query

If your aim is maintain your asset base in property it is better to hold. As a sale and purchase of a property will cost you a lot of money …and you have already paid a lot of those costs when you originally purchased your PPOR.

The costs of selling your existing PPOR and buying a new investment property include the agents commission on sale, stamp duty on the new purchase and legal’s on purchasing a new property…and at the end of the day all you will do is  end up with a similar asset (and this may not be as good as the existing property) and the whole exercise has cost you tens of thousands of dollars.

This money is better spent by adding to your portfolio and using it as a deposit on another property (cash flow permitting).

Based on the numbers in your example above your rental should be approx $12,000 net of expenses and if you deduct the interest on the $100,000 loan @ say 7% = $7,000 your net positive cash flow would be approx $5,000.

On top of this you may then be entitled to claim as a tax benefit the depreciation on the building (if built post 1985) or any renovation or improvement work undertaken whilst occupying .

Also you should be entitled to claim the depreciation on the fixtures and fittings within the property.

Depreciation is the best friend of the investorDepreciation is the best friend of the investor as you do not have to outlay any cash to receive a tax deduction.

To maximise this deduction on depreciation I would always recommend a quantity surveyors report, the cost of this report is minimal compared with the benefits obtained.

In this example I will assume you will get some form of tax benefit from depreciation and the net tax position (payable or refundable)) would be minimal and you would still have a reasonable cash flow…being approx $5,000.

On top of the depreciation deduction described above now that the PPOR is an investment property you will be also be able to claim tax concessions on all costs associated with maintaining this property such as Council and water Rates, repairs and maintenance, agent fees, travel if required and other sundry expenses such as a portion of a home computer if used to manage the property.

 When claiming costs on repairs and maintenance you need to take care…

As when you move out you may be considering doing some work to the property to ensure tenancy.

The ATO keeps a watchful eye on claims in this area, because it can be grey.

Basically, if you  apply this rule of thumb  costs to simply  bring something back to the original condition it is classified as a repair, for example re- painting the interior of the house or putting a new kitchen cupboard door on an existing kitchen , or  replacing an area with carpet to match the existing carpet…. however if you replace an item with something better….

Like replacing the kitchen with new Kitchen or replacing a dishwasher (vs repairing it) or taking the carpet out and replacing this with timber flooring …  these are capital improvements and will need to be included in your depreciation schedule and written off over time.

I would also consider converting my $100K loan on this now investment property to an interest only loan so to maintain the tax benefits and then I would ensure you increase your principle repayments on the new loan for your new PPOR which would not be tax deductible.



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David Naylor was a founder of Chan and Naylor, accountants, is a leading property tax specialist. As a seasoned property investor he shares his unique understanding of the relationship between property investment and tax.

'Thinking of renting out your home and buying an investment?' have 7 comments

  1. Avatar for Property Update

    September 24, 2013 @ 9:00 am Minh Nguyen

    Hi David

    You forgot to mention that they would have to pay tax on the $5000. They would be better off selling this house, pay off the $100,000 loan and use the rest of the money to reduce the loan for the new house as the interest for the new house is not tax deductible. They can then use the equity of the new house to borrow say $400,000 as an interest only loan to buy an investment property. The interest paid is wholly tax deductible. Your advice would have them paying high non-deductible interst on the new house for a long time, while paying only minimal amount of tax deductible interest on the $100,000 loan.

    Minh Nguyen


  2. Avatar for Property Update

    September 24, 2013 @ 9:50 am Minh Nguyen

    Hi David

    Another problem with your advice is that when they sell the current house in the future as an investment property, they will have to pay capital gain tax whereas it is CGT-free if they sell it now. The issue with your article is that you tend to focus on the tax benefits in property investing. People should focus, first and foremost, on the potential for capital gain when it comes to investing. Tax benefits are secondary.

    Minh Nguyen


  3. Avatar for Property Update

    September 25, 2013 @ 9:31 am David Chuan

    I think $5000 has already been tax deducted or depreciated from the repair and work done on the investment property.

    in regards to CGT correct me if I am wrong as I am currently doing the same for my investment properties. The strategic is buy and hold and withdraw equity to buy more. This way no cgt. I usually move into my investment property for 12 months as main residence before I sell so no CGT and I get to fix and clean it before selling it.


  4. Avatar for Property Update

    January 22, 2015 @ 9:17 am Hamish

    Some people think that, now they have an investment property with substantial equity, that they can borrow against this equity and use it for personal reasons and claim the interest as a deduction.

    And they would be wrong. The deductibility of the interest depends on the use of the funds, not the source.

    So a loan against an investment property used for an overseas holiday is not deductible. A loan to buy another investment property is.

    One way of dealing with this is to ensure the bank lends you the maximum against the new investment property even if you don’t use it all. You can then apply any surplus cash against this loan and redraw it at a later stage (for the overseas holiday). Redrawing your own money from an offset account for personal reasons is different to borrowing for personal reasons.


  5. Avatar for Property Update

    January 24, 2016 @ 11:10 am wayne wanders

    David easist way to answer this is to prepare a cash flow of both options. Do this and pick the best option . Wayne


  6. Avatar for Property Update

    April 6, 2016 @ 6:48 pm Chanelle

    Can I ask if I have lived in my PPOR for 11 years then I buy another property to live in thus making the original house an investment, will I pay CG tax when I sell the original house in the future?
    Should I refinance the original loan to the max for tax benefits and lower the loan on the new property? Any help would be greatly appreciated.


    • Avatar for Property Update

      April 6, 2016 @ 9:07 pm Michael Yardney

      Chanelle you need to get tax advice on this it’s complicated – you can only hgave one PPR at a time. – if you borrow against your old home (now an investment) for your new home the loan is NOT tax deductible as the purpose of the loan was not for earning income


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