I have decided to move my family into a new home but want to keep my existing home – what am I allowed to claim?
Often people are attached to the property they have lived in, having put time and effort into getting it just the way they like it. They may have outgrown the property as their family has enlarged, or they may find themselves in a property that no longer suits their needs. It’s time to move on but is it a good idea to hang on to that property as an investment? What are the tax implications?
Two of the largest deductions available to rental property owners are interest and depreciation. Interest and expenses such as council rates, insurance, strata levies and repairs and maintenance are deductible from the time the property is available to be rented out, ie, is listed with a real estate agent.
It is important to remember however, that only interest on the loan that was used to purchase the property (or subsequently improve it) is deductible. If you’ve paid out your loan or reduced it over time, then only the remainder is deductible. If you’ve ever redrawn funds from your loan to go on holiday or purchase a car, then that compromises the deductibility of the loan – permanently.
Although you can use your old home as security on the new property, extending your existing mortgage or borrowing against the old house does not make the additional funds loaned for the purchase of the new home deductible.
A depreciation schedule drawn up by a quantity surveyor can establish how much depreciation is available to be claimed on the property. Generally 2.5% per annum of the construction cost is deductible over a 40 year period subsequent to construction, and other depreciable items such as stoves, carpets, blinds etc are depreciated at their effective lives as determined by the commissioner.
When a property that had previously always been a main residence first becomes a rental, its cost base for capital gains purposes is the market value at that date. If you are simply renting elsewhere, then you can be absent from that property for up to six years without having to pay tax on any capital gain because you can still claim main residence exemption for that period. However, if you own another home that you are living in, you’ll need to decide which property you’ll claim as your main residence. The six year rule can re-start if you move back into the property for a time and then move out again.
If you sell your old property within a few months after you’ve moved into the new one, you can call both properties your main residence for up to six months if you genuinely have resided in both.
We can provide you with more specific information and an analysis tailored to suit your circumstances so that you know the tax implications of the options you have. Please do not hesitate to contact us if you have any queries.
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