Negative Gearing

[fionas]

OK, new plan is that we're going to rent out our house (which we have a home loan on) and move to somewhere bigger because we need more space.

So, I think this is negative gearing and means that the interest we pay on the home loan becomes tax deductible right?

Would it be better to do renovations to our home after we move out - do we get a tax break on those too if we're negatively gearing?

[FabFiona]

I think (and I should know because we negative gear!) that you can claim back at tax time:
1. The difference between your mortgage interest that you pay and the rent that you collect from your tenants. For example, this year we didn't have much to negative gear because interest rates were so low.
2. Any maintenance or improvements that you make to your investment property.

As for the issue of renovations, I would say yes in theory it is better to do them afterwards for tax reasons. However you need to then think about impact on your tenants and various rental tenancy laws. If you are planning *major* renovations, then it might be more complicated due to tenants being in the property, needing a livable safe space etc. That then might drive up the cost of the renovations and wipe out any potential tax saving.

Just something to investigate further.

[Laranna]

Yep if your income from the rental property is less than the mortgage, interest, and expenses then that is negative gearing. You can claim the interest on the mortgage (you might want to consider swapping it to an interest only loan), as well as other things like depreciation on the building and things like carpets, etc. Best to check with your accountant or the ATO because they will know what and how much you can claim.

Depends what reno's you're thinking of doing and whether it is going to impact on tennants if you have them in there already or if you prefer to do the reno's first and then put tennants in, can you afford that time period where you will have no rental income while you are doing the reno's.

[fionas]

Thanks ladies - I've set up an apptment with a financial adviser but I want to know as much as possible before that IYKWIM.

Yep, it's already an interest free loan. So you reckon I can only claim the difference between the interest we pay and the rent we receive? Hmmm, that puts a slightly different complexion on things.

I'd do the renos after we move out but before tenants move in. We can afford to have it vacant for a couple of months if need be. Not ideal but doable. The sorts of things we're looking at doing are: fixing roof (has a leak), new kitchen, repainting hallway (is discoloured because of leaky roof), BIRs in second bedroom because that's usually a biggie for renters.

[misty]

some things in relation to property investing are deductable expenses (intrest on the mortgage used to purchase the house) whilst others are depriceciating expenses (carpets, etc), and then there are some expenses that are deductible over a certain number of years (purchase costs, and in the ACT stamp duty). In terms of whether an expense is deductible or not depends on whether the expense is going towards a repair (ie, fixing an existing fence) or replacement / improvement (replacing an existing fence with a new one).

Get yourself an accountant who deals with property (that is important) and ask them if you are unsure.

[Laranna]

You should be able to claim the interest part of the loan, not the out of pocket difference.

What I meant was that negative gearing is when you are out of pocket from your investment property, whereas positive gearing is when you are getting a positive cash flow and actually taking home money which you would then pay tax on.

Paul Clitheroe's book "Making Money" has an excellent calculation for working out your gearing/cash flow for an investment property. I did it all up in an Excel spreadsheet a while back. It's on my old laptop, I'll see if I can hunt it down for you.

[*Beema*]

You should be able to claim the interest part of the loan, not the out of pocket difference.

What I meant was that negative gearing is when you are out of pocket from your investment property, whereas positive gearing is when you are getting a positive cash flow and actually taking home money which you would then pay tax on.

Paul Clitheroe's book "Making Money" has an excellent calculation for working out your gearing/cash flow for an investment property. I did it all up in an Excel spreadsheet a while back. It's on my old laptop, I'll see if I can hunt it down for you.

If you can find that out for me too that would be awesome, we have a rental which I think I will need to sell before we have No'2 and I am curious as to whether we can afford to keep it, or just cash up a bit to do a few more things to the new house and have bubs and be able to take some time off without the big stress of the two mortgages