What are the pros and cons of negatively gearing a mortgage in Australia while renting another property?

Question

My wife and I purchased our first home in South-East Queensland about 18 months ago. We're now considering renting it out and renting another property ourselves ... basically for tax benefits. If we do so, we would be negatively geared.

I know little about negative gearing and the tax benefits. Can someone please explain the pros and cons in relation to our situation?

We estimate we would receive rent of about $400 per week and be paying out a similar amount. Our mortgage is currently about $2700 per month (about $625 per week).

Answer 1

PRO

You are unable to claim any expenses in your tax return when you own and live in your own property. Whereas, a rental property owner can claim all the expenses associated with the running and maintenance of the rental property in their tax return.

You have the benefit of avoiding capital gains tax for 6 years and reducing your taxable income by the rental property losses.

You are able to reduce your taxable income due to rental property losses, thereby paying less tax. By increasing your loan repayments with the tax savings, you can reduce the period of the loan (saving money on interest).

If the rental property losses are substantial, you may want to request a variation to your PAYG Withholding to receive the savings in your weekly pay packet instead of waiting to the end of the financial year. I have provided a link.

CON

As you are renting, you are unable to make any changes to the property you are in as it is not yours. If you remained in your own property, you are able to make small changes or renovate (only in those areas that add value eg. kitchen & bathroom) to maximise the sale price when you sell the property in the future.

If you decided to buy another property to live in, you are only able to claim one property as your main residence to receive the main residence exemption. I have provided a link.

ADDITIONAL INFORMATION

Once you move out of your property it becomes a rental property. Investment property owners are able to claim many expenses against rental income. I have provided a link to the ATO resource "Rental Properties 2007-2008". The net loss from the rental property will be shown in your tax returns (you and your spouse) depending on your entitlement to the property (usually shown on the purchase contract as 50% entitlement each).

As the property has been your main residence for 18 months, you are able to rent out your home for a period of up to 6 years before capital gains tax becomes an issue. If your home is rented out for more than 6 years, you will pay capital gains tax on the market value of the property from the time the 6 years expires to the end of the rental period. The capital gain will need to be paid when you eventually sell the property.

I would suggest you document the date that you move out of the property and keep it in a safe place.