Which way am I better off ?

[almostthere]

I have recently bought a property which I initially intended to rent out .but now I am thinking whether to move out their myself ? Can someone point out pros and cons of both the option and provide advice on what I am better off doing ?

**Some facts***

• I am currently renting myself and the rent that I am paying is same as the rent I will be getting from my property if I rent it out ($390 pw)
  
• There is still 6 weeks of lease remaining so If I decide to move, I will be out of pocket for around 4 weeks of rent tentatively as the cost of breaking the lease.
  
• The place where I live currently is 2km closer to work compared to that from my property.
  
• I had advertized my property for rent and have got few people applied for it.. but all the prospective tenants are able to move in only after two weeks..so two weeks of loss of rent..( the place is vacant for two weeks already )
  
• My current place and the property I bought is more or less similar in terms of facility and convenience.
  
• I have bought this property as joint tenant with my wife..so the negative gearing return would be less as my spouse's taxable income is just around 20k..mine is in the 37% bracket

Thanks in advance,

 

[Peter_Tersteeg]

The financial difference if the two rents are the same comes in favor of continuing to rent because the other costs of ownership (rates, maintenance, etc) become tax deductible.

An advantage of renting is you can often afford to rent where you prefer but you may not be able to afford to own there (2km isn't much of a difference, but it's something).

Even if your gearing isn't optimized, it's still a benefit.

The disadvantage of renting over owning is it's less secure as your landlord can ask you to move out fairly easily.

 

[almostthere]

The financial difference if the two rents are the same comes in favor of continuing to rent because the other costs of ownership (rates, maintenance, etc) become tax deductible.

An advantage of renting is you can often afford to rent where you prefer but you may not be able to afford to own there (2km isn't much of a difference, but it's something).

Even if your gearing isn't optimized, it's still a benefit.

The disadvantage of renting over owning is it's less secure as your landlord can ask you to move out fairly easily.

Hi Peter,

Thanks for the reply. But don't you think the negative gearing benefit (which in my case is around $2k combined) will be wiped out by the property manager agent fees + landlord's insurance + excessive maintenance that tenant might request ?

 

[almostthere]

Cgt

Another plus point with moving myself is the 50% CGT discount..if I live there for a year..though I don't intend to sell it anytime soon ..it would be good to have this discount handy if I happen to get any lucrative offer down the line

 

[jrc]

Another plus point with moving myself is the 50% CGT discount..if I live there for a year..though I don't intend to sell it anytime soon ..it would be good to have this discount handy if I happen to get any lucrative offer down the line

You will get the 50% anyway.

 

[Joe D]

Given that it is newly purchased with no prior tenant, I believe you should move into it and live there for at least a year.

It will then establish the property as your PPOR and will be exempt from any CGT providing you don't have any other PPOR.

You can always then move out and rent it.

 

[almostthere]

You will get the 50% anyway.

You are right the 50% discount rule is applicable to IP as well if held for period greater than 1 year.. thanks for reminding me on this.. somehow I forgot it

 

[knightm]

Given that it is newly purchased with no prior tenant, I believe you should move into it and live there for at least a year.

It will then establish the property as your PPOR and will be exempt from any CGT providing you don't have any other PPOR.

You can always then move out and rent it.

Yep this one applies so there is NO CGT for up to 6 yrs. Can only be claimed on 1 property though. If you hanging all your hopes on selling this 1 property for profit at some stage then moving in for a while first then renting could work and save any CGT. I myself chose to just keep renting and buy multiple IP's. I paid some tax but had 3 IP's growing in the market so the profits were fine. They were interstate at the time so if I had purchased something to live in I would have done nowhere near as well coz it had already boomed.

 

[danwatto]

I would move in for first year to designate it as your primary residence then move out and claim all the deductions of an IP.

Ask your accountant to confirm the rules for the 6 year CGT exemption and what records to keep.

I moved out of mine after 4 years and got back about 15k in my tax return the first year, wished I did it sooner. Depreciation helped alot as it's a newer place but most places will get a bit back.

Regarding insurance - the bulk of the cost is the building and contents, not the landlord insurance. You have to consider some insurance even if you live there.

 

[almostthere]

Yep this one applies so there is NO CGT for up to 6 yrs. Can only be claimed on 1 property though. If you hanging all your hopes on selling this 1 property for profit at some stage then moving in for a while first then renting could work and save any CGT. I myself chose to just keep renting and buy multiple IP's. I paid some tax but had 3 IP's growing in the market so the profits were fine. They were interstate at the time so if I had purchased something to live in I would have done nowhere near as well coz it had already boomed.

I don't intend to sell it anytime soon ..moreover, I don't think I will be able to satisfy the allowed exemption reason for the 6 year rule even if I move out to the next property after a year..

 

[almostthere]

Numbers

I ran some numbers to check which is more profitable ..and here is what I see :

PPOR
====
Interests : $19711
Body Corp +Water :$2500
Maintenance : $400
Contents Insurance :$400

Total Outgoings : $23,011

IP
===
Interests : $19711
Body Corp +Water :$2500
Maintenance : $400
Landlord's Insurance :$400
Property Management : $2000
Rent for current place : $20280
Rent from IP : $20280 (income)
Tax Rebates : $2000 (income)

Total Outgoings : $23,011

So both are coming to be almost the same ..Do you think this is a fair calculation or have I missed out any significant variable?

 

[mumbai]

I don't intend to sell it anytime soon ..moreover, I don't think I will be able to satisfy the allowed exemption reason for the 6 year rule even if I move out to the next property after a year..

Did not quite understand this part. Why would you not qualify for 6 year exemption?

 

[almostthere]

Did not quite understand this part. Why would you not qualify for 6 year exemption?

Hi Raj,

As per ATO following are some valid reasons for moving out of the PPOR for the 6 Year rule :

Moving from your main residence could be for reasons such as:

• accepting a new job interstate or overseas
• staying with a sick relative long term, or
• going on an extended holiday.

https://www.ato.gov.au/Media-centre/Articles/Moving-on--Remember-the-six-year-rule-for-CGT/

Will it consider the reason being that I just want to move further close to work or if I want to move to a bigger place or house ?

 

[mumbai]

I ran some numbers to check which is more profitable ..and here is what I see :

PPOR
====
Interests : $19711
Body Corp +Water :$2500
Maintenance : $400
Contents Insurance :$400

Total Outgoings : $23,011

IP
===
Interests : $19711
Body Corp +Water :$2500
Maintenance : $400
Landlord's Insurance :$400
Property Management : $2000
Rent for current place : $20280
Rent from IP : $20280 (income)
Tax Rebates : $2000 (income)

Total Outgoings : $23,011

So both are coming to be almost the same ..Do you think this is a fair calculation or have I missed out any significant variable?

Yes, you have missed out. All (or most of) the expenses towards the IP is tax deductible. Also, if you are planning keep it as an IP for long term, the general suggestion is to keep it as Interest Only loan, hence the mortgage payment will also be significantly lower.

You property will have a CG irrespective of being an IP or PPOR. But, you might be able to increase the rental every year(depending on the fair market value) and that will work in your favour as well.

I am not aware where your unit is, but any reason why it has not been leased in past 2 weeks? Higher than fair market value rent asked or not having a good PM. It is hard to imagine a metro Sydney not being leased out for 4 weeks?

Last, but most important, do you like this place to be your PPOR? Residences are mostly personal choices and over any profit/loss scenarios. If you like this to be your residence for a long time, you should not be even thinking from an IP perspective.

 

[mumbai]

Hi Raj,

As per ATO following are some valid reasons for moving out of the PPOR for the 6 Year rule :

Moving from your main residence could be for reasons such as:

• accepting a new job interstate or overseas
• staying with a sick relative long term, or
• going on an extended holiday.

https://www.ato.gov.au/Media-centre/Articles/Moving-on--Remember-the-six-year-rule-for-CGT/

Will it consider the reason being that I just want to move further close to work or if I want to move to a bigger place or house ?

Those are examples and not requirement. You can choose to just stay next door to your rented property for 6 years, come back and still qualify for the exemption

 

[almostthere]

Yes, you have missed out. All (or most of) the expenses towards the IP is tax deductible. Also, if you are planning keep it as an IP for long term, the general suggestion is to keep it as Interest Only loan, hence the mortgage payment will also be significantly lower.

You property will have a CG irrespective of being an IP or PPOR. But, you might be able to increase the rental every year(depending on the fair market value) and that will work in your favour as well.

I am not aware where your unit is, but any reason why it has not been leased in past 2 weeks? Higher than fair market value rent asked or not having a good PM. It is hard to imagine a metro Sydney not being leased out for 4 weeks?

Last, but most important, do you like this place to be your PPOR? Residences are mostly personal choices and over any profit/loss scenarios. If you like this to be your residence for a long time, you should not be even thinking from an IP perspective.

Hi Raj,

• My loan is Interest Only and I intend to keep it the same even if I make it a PPOR
  
• The Tax Rebate of $2000 is what I have come up after considering all the tax deductible expenses ( I use PIA software to calculate this )
  
• I think the reason for not getting rented for last two weeks was the presentation. I did nothing after I purchase to improve the presentation.
  
• So after two weeks, I realized this and changed the bathroom vanity & basin , changed some rusted pipes in bathroom, stitched the curtains which were loose, and did a thorough clean up ..so after doing all this , out of 5 groups who visited in the last Open inspection, 3 groups have applied but all of them need to give 14 days notice to the current agent so can't move before September 9.
  
• I don't see the place being our PPOR for long term .. we plan to buy a townhouse/house near to our work for PPOR in couple of years down the road..

 

[travelbug]

As you have the option, I'd move in to it first (as others have said) to establish it as your PPOR then you can always move out later and get the benefit of the 6yr rule. As long as you move in first (before renting it) and don't have another PPOR you will be eligible.

There are tax benefoits to renting it out but as the outgoing costs are minimal (when you subtract the rent from the costs) the tax benefits are not that great.

 

[Peter_Tersteeg]

Hi Peter,

Thanks for the reply. But don't you think the negative gearing benefit (which in my case is around $2k combined) will be wiped out by the property manager agent fees + landlord's insurance + excessive maintenance that tenant might request ?

Excessive maintenance isn't any different from what you might spend on your own home. If it is excessive, deny it.

PM fees and landlord insurance aren't that much, less than 6-8% when you factor in the net after tax deduction cost.

No denying it can be close, but usually you are financially better off to rent your property and rent yourself. This is just a financial benefit however and stability and a sense of ownership is a very powerful motivator to live in your own home.

Living in the property before turning it into an investment can work very well. You need to do the numbers carefully based on the stamp duty savings, possible first home owners grant, etc. This can be a nice cash boost to get you into the first property.

 

[almostthere]

Living in the property before turning it into an investment can work very well. You need to do the numbers carefully based on the stamp duty savings, possible first home owners grant, etc. This can be a nice cash boost to get you into the first property.

Hi Peter, this is old established property so no stamp duty savings/FHG grant etc are not applicable..

 

[almostthere]

Hi Everyone,

Thank you so much for all the suggestions.
I have finally decided to go with renting my property.
I got a tenant who is ready to move this weekend so needn't wait until 9th September..but the primary reason for this decision was to avoid the hassle of moving out, avoid lease break fee for my present residence..and to be closer to work (albeit by just over 2 kms)..

Cheers,
Ujwol