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Tax deductions when renting out room in PPOR

Discussion in 'Accounting & Tax' started by fleathedog, 13th Jul, 2016.

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  1. fleathedog

    fleathedog Member

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    Hi all,

    I plan to buy a 2BR flat in Brisbane to live in. I don't anticipate living there for more than a few years, after which time I will rent it out. I anticipate that while still living in that place, I'll purchase a second property as an investment, with a long term goal of building a portfolio of 5~ properties.

    So as I mentioned, in the mean time, I would like to rent out the second room to help me with this goal, but cannot find out the implications for deducting expenses. I'm assuming that if I'm earning income I can deduct some portion of my interest and other expenses, but how do I work what I can claim as a deduction? And if I am deducting part of the interest on the loan, what load structuring issues do I need to consider?

    Thanks in advance for anyone taking the time to answer this!

    PS - I understand that there are CGT implications to doing this, but as the near term cash flow is more important to me, and I plan to hold it indefinitely, this does not concern me
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You can apportion based on floor area shared. Dont forget any car space.

    No real issues with loan structuring. Just try to borrow as much as possible interest only.
     
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  3. fleathedog

    fleathedog Member

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    Sorry, so just to be clear... So say in a simple 2BR scenario where there's 100sqm total, 60sqm of kitchen, shared bathroom and living space, and each of the bedrooms are 20sqm. The shared areas are comprise 60% of the shared floor space, so 60% of the interest is deductible?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes. Exclude any areas tenant doesnt have access to.
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If its a shared area then only their half is deductible. ie 20+ 50%x(60%) = 50%
    You cant claim 100% of shared areas. Only the portion of the shared use.
    You may find that for a 2 Bed that 50% is a normal deductible portion.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes I would think 50% in that case too. If there is a carspace then take this into account too.
     
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  7. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    And don't forget a depreciation schedule!
     
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  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What about the shared furniture too?
     
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  9. fleathedog

    fleathedog Member

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    Yes, and yes. Thanks guys.

    I'm aware of these things, but I'm a complete noob at all this, so I'm still getting my head around the concepts, and getting some ball park numbers together! I'll go to a tax adviser and quantity surveyor to sort all this out when the time comes to seriously crunch the numbers.
     
  10. Jerry O

    Jerry O Well-Known Member Premium Member

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    So let's say in a three bedroom property where 2 rooms are rented out and 1 is yours, will the basic computation be the same?

    Room 1: 100% Tax Deductible
    Room 2: 100% Tax Deductible
    Room 3: 0% PPOR

    Living Room, kitchen and all shared areas: Floor space divided by 3 and 2/3's will be deductible.

    Is this rough calculation sounds about right?
     
  11. Sonamic

    Sonamic Well-Known Member

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    But aren't you a FHB? So you'll have 12 months to sort all this out while you do your "time".
     
  12. fleathedog

    fleathedog Member

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    Yes that's right, but I'm just trying to get my head around everything now. The main thing I was concerned about is that there may be finance structuring implications
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Its just a mathematical question - what does it all add up to? Don't forget en-suite bathrooms.
     
  14. Whitecat

    Whitecat Well-Known Member

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    But the tenant doesn't have exclusive access so kitchen should be 50%
     
  15. JZ93

    JZ93 Well-Known Member

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    Will you have to pay cgt when you sell if you claim depreciation?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    The property will be subject to CGT whether you claim it on not.
     
  17. JZ93

    JZ93 Well-Known Member

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    So if you rent out rooms on a PPOR you need to pay CGT?
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  19. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Not to mention the fact that claiming depreciation doesn't quite have as much of an effect in terms of increased CGT as many are led to believe.

    There have been many threads here explaining why but the short version is that a.) your CGT will likely be discounted by 50%, whereas there are no corresponding penalties to depreciation deductions, and b.) 99% percent of financial professionals will tell you that you're better off with the increased cash flow now than to forsake that for a later saving (that might not come to pass, or at least not in the way you expect).
     
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  20. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Chris

    I arrived at the same conclusion when I was considering the merits of claiming QS deductions by non-residents as they seemingly have no CGT discount.

    - The deduction will be more efficient for mimimising tax today ;
    - Then the QS deduction may provide a carried fwd tax loss which can be used to offset either a future CGT profit of another source (ie other property) OR carry fwd indefinitely to offset a CGT gain
    - Offset future income of any nature whether earned on non-earned or if residency reverts

    A dollar of deduction today is always better than anticipating a possible deduction in the future. Laws can change. Residency and other circumstances can change.

    My conclusion is that a QS report is always better than not having one. I cant truly think of only one time when a QS report doesnt help. A very short term ownership. So unless the cost of the report is matched by a tax benefit dont bother...Thats rare to find the value less than the cost. And the BMT Fee Guarantee covers that issue.

    Look at Trump. $192M of tax loss in 1992 and he is still enjoying the benefit except when Hillary reminds the world he hasnt paid tax.
     
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