My friend is returning soon to live back here after an overseas posting. They own two homes. They are deciding which one to live in. Both homes are nice, suit their needs, and are in same suburb. The factor (and why I'm posting on here) is they are trying to work out which will give them the best tax deductions and better daily cash flow out of: - Choice 1: live in House A, rent out House B. - Choice 2: live in House B, rent out House A. Their goals are for this two year posting, are to: - maximize tax deductions (both PAYG salaries); and - to reduce costs. They plan to hold both houses for the long term so CGT considerations are not really there at the moment.There is no ex-PPOR CGT free on either. Here we go on the numbers. Any advice or thoughts would be appreciated to pass on to them to help their planning. GROSS incomes 2019 - $160,000 combined ($100/60k) House A Rental Income: $24, 960 ($480 pw.) Expenses: $20,280 - mortgage (on a P&I loan since the IO 5 year period is over) 2019 FY costs: $5500 (PM, repairs, utilities etc) Net result - $-820 pa. House B Rental income: $650 pw ($33,800 PA) Costs - $40,020 Interest payment (IO loan) $6000 yearly running costs $46,020 TOTAL COSTS -$12220 total loss thanks. so is there a winner? which option would reduce their costs and increase tax deductions and by how much roughly.
Are they able to claim depreciation on either/both of these properties? Do they own these as 50/50 or other percentages? What is the interest component only on house A (P&I does not provide a comparsion to IO loan) Is leasing out both and renting elsewhere C option C?
work out the taxable income for each of them. Don't include principal payments, but do include non-cash expenses. If the owners are the same then they will 'save' more tax by renting out the one with the biggest loss or the smallest income.
Which one is newer? Depreciation will be a factor in this. Also, they should probably look at refinancing their P&I loan into IO so they can save for a home some day and maintain deductions once they move out.
Hi Scott yes - depreciation yes yes - the husband/wife own both, both as 50/50 'joint' i think it's called. not sure waht interest component is vs principal, but its the first few months of P&I after 5 yrs of IO...so maybe mostly interest?? No - apparently they are 'over' renting overseas and want to live in one of their own homes. ta V
Hi Jess Yes they have a dep sched on both. The more expensive house is newer. they were not able to change to IO..something about the fact ehy'd already had five years IO and that's the max??? Now it must be PnI.
That would be House B. It would lose 12k pa approx (+/- dep sched etc). The House A would lose only about $900 pa...and from my experience, if their dep sched would make their expenses on paper look bigger, then they'd save more almost to it being neutral or slightly postiively geared. Is this right? I tried to help them and came up with this. Leave alone tax deductions, that's out of my league. And if rented out, lets' assume 52 weeks rented though of course it could be more or less, but to KISS. But for pure actual cash going in and out by them: IF they live in House A. Their annual costs would be $25,780. Plus 12,220 to pay toward the other house.Total expense: $38,000 IF they live in House B. They'd pay $46,220 plus $820 against the House A. Total expense: 47,000. So - 9k different. I wonder what the tax deduction would be like. 9k...it's kinda here nor there, but still better off in their pocket than not
You could refinance it to extend the term back out with a fresh IO period (assuming all else was in order!)
Our "My Inv Property Estimator" tool can be used to model the property comparison and the notional tax issues. Its one the free property tools we give our clients Here is a updated version fresh for the 2019 tax year
Seems to be prop A from your calcs but keep in mind once they move in will lose ability to claim depreciation on plant &!equipment of rented out again once private use. Depreciation is still ok but another factor to consider. You seem to have your answer though. Taxable CG I assume would be similar as you say same suburb. As others mention - run the full calcs.
The unknown is the capital growth.Get that wrong and the debt trap and the loss can bite. Many people have held Sydney property and are under water. BUT its only a loss if you sell and walk away. But will it turn ? I said this on Somersoft years ago. You only lose when you sell.
Plan is to hold both until after they’ve both lost all their teeth apparently LOL ie retirement fund plan
Me either LOL !!! Terry To compare: - rent income - running/mortgage expenses Between both houses, it looks like they’d have more cash-flow if they moved into House A.
