How to maximize the tax benefit in my situation?

Hello, I currently live in a newly new unit in Warwick Farm and I recently bought another unit in Parramatta, I am thinking should I move to Parramatta and rent out the unit in Warwick Farm. The water rate/council/loan amount/interest payment of both properties are very similar, and the major differences are:

Warwick Farm unit, built year 2015, strata $650 per quarter, 1 bedroom plus study, market rent ~$380 per week

Parramatta unit, built year 1979, strata $960 per quarter, 2 bedroom, market rent ~$400 per week

If only considering from finance perspective, i.e. depreciation, maximizing tax benefit and etc., which unit I should move to? Do I miss anything in my thought mentioned above? Thank you for any opinion.

 

Hi @Matche

It depends on what the "purpose of the borrowings" was on each property when you took out the loan. If the purpose of borrowings on Warwick Farm was to acquire the place for you to live in it, then if you move out now and convert it to a rental, you probably won't be able to claim the mortgage interest as a tax deduction. Considering that is your biggest expense, it would be a very big mistake.

Check with your accountant and mortgage broker to understand your position.

 

The 2015 construction will definitely get you better depreciation (unless the other unit and its development has been subject to a major refurbishment). A new 1BR unit will see most people with a deduction of between about $8 000 and $10 000 in deductions in their first full financial year's claim. An old unit can be between $2000 and $6000, depending on the level of refurbishment and its common area. You'll also find in general that there'll be much higher deductions yearly even a couple of decades down the track for the newer property.

If you have links to listings for the properties then I could refine those estimates.

 

With all due respect Jac, that's not correct. If he makes that property an IP he can certainly claim the interest.

 

The purpose of the loan was to buy the property. No deductions while living in it as a PPOR.

But if it becomes an IP, then the interest becomes tax deductible. Complications may arise if there were redraws for personal use.
Marg

 

Agree with @Jess Peletier and @Marg4000

Also, what's the interest payments on each?

You could easily construct a spreadsheet to give an idea of each scenario.

 

I disagree with this.

If the borrowed funds were used to acquire the property then the interest would be deductible once it is available for rent.

It doesn't matter if you originally borrowed with the intention to live in the property.

 

You should consider what the net taxable income issues are with each option.

ie Rent A and PPOR B or
Rent B and PPOR A

Taxable income (rent) less (allowable ownership deductions)
Depreciation (W Farm may be far higher !!)
Interest rate changes for change in purpose (0.5% extra ?)

The 6 year rule may allow you then to "choose" deferral of one or even both CGT outcomes if you satisfy the main residence rule (or absnece rule) for both for a time. ONLY one of them can be exempt but it may allow you a choice later. Where at present you can only consider WF as your main residence.