Living in the property vs. rent out as IP while renting myself

[JohnHenry]

Hi people,

What's your suggestion and opinion regarding the two options below:

1. Buy a property and then you live in it (renting one of the spare room)
2. Buy a property and then rent that out fully while rent myself in some other location.

Which option is the most profitable do you think ?

[dtraeger2k]

Really depends on situation.

Are you eligible for FHOG?
What are your living arrangements at the moment? PPOR / renting etc

Also, quite often, the areas we'd want to invest in are NOT the areas we'd want to live in.

What are you trying to achieve?

[JohnHenry]

Not anymore I'm not eligible for FHOG since I already have IP which was my PPOR, I'm trying to keep my cash flow controllable while still having a enjoyable life.

[Terry_w]

Do the sums and work it out. It should be a simple mathematical answer - and then the not so simple personal and family preferences.

[matto_]

If you look in the spreadsheet thread there are some sheets that have been set up for this particular dilemma, well the financial part anyway.

Howeveras Terry points out, that is only one part of the equation

[RumpledElf]

If you're young, single, and don't have a house full of precious Stuff, I reckon getting a 3br place and renting out the other two bedrooms is the best way to get ahead. Then kick the housemates out (or move out into a new house) when you want to get married and have kidliwinks.

[Ideo]

Originally Posted by JohnHenry

Hi people,

What's your suggestion and opinion regarding the two options below:

1. Buy a property and then you live in it (renting one of the spare room)
2. Buy a property and then rent that out fully while rent myself in some other location.

Which option is the most profitable do you think ?

I've chosen option 2.

It may not be the most profitable, but it is the approach that works best for me.

[tobe]

option 2 gives you more serviceability and therefore a higher loan amount available.

[The Chaser]

Originally Posted by JohnHenry

Not anymore I'm not eligible for FHOG since I already have IP which was my PPOR, I'm trying to keep my cash flow controllable while still having a enjoyable life.

Hi there

One other thing that you will need to consider in your calculations if you aren't already is the future affect of CGT should you choose to sell either of your properties.

For your existing PPOR that is now an IP you could ultimately choose to claim the six-year CGT exemption should you choose to sell this property within the first six years it is rented (or you move back in before the 6 years is up and then decide to eventually sell). In which case you couldn't also claim a CGT exemption for the property you are considering buying because it can only apply to one PPOR in any given period of time. So whether you rent out a room(s) or not, the whole property would incur CGT on sale.

Alternatively let's say that you buy another property as per your original post and intend claiming that property as your PPOR. It's my understanding that if you rent out part of your home, you lose part of your main residence exemption for CGT purposes. So if you use part of the property to produce rental income whilst you are also living there, your main residence exemption would be lost for the portion of the property utilised for the period it was rented and on a pro rata basis. However you can increase your cost base by the ownership costs you haven't been able to claim as a tax deduction during your period of ownership.

Hopefully that all makes sense. The bottom line is that if you ultimately intend selling one or both of your properties in the next few years, then you really want to consider the CGT scenarios, as this can have a big effect on your question as to which option may be the most profitable.

Please be aware that the information above is just my personal unqualified understanding, so you should definitely make your own enquiries as to its accuracy!

Good luck with your decision!

Angela

[matto_]

Originally Posted by The Chaser

It's my understanding that if you rent out part of your home, you lose part of your main residence exemption for CGT purposes. So if you use part of the property to produce rental income whilst you are also living there, your main residence exemption would be lost for the portion of the property utilised for the period it was rented and on a pro rata basis. However you can increase your cost base by the ownership costs you haven't been able to claim as a tax deduction during your period of ownership.

I had heard the above also. and was hoping for clarification.

"My Friends" Scenario: Bought PPOR - lived in it for 1 year, before deciding they wanted to have a couple of flatmates in the rooms which werent being currently used. For 3 or so years - had the additional two rooms rented.

Subsequently the PPOR main residence has been claimed on this property for a further 7 or so years (presuming that the entire CGT would be covered), however based on the above this would not be the case.

Question:
When would the pro-rata-ing start and stop (and would it continue for the life of the property),
What proprtions would be looked at (in this case there was actually the two owners and two renters living in the house).
How could I calculate the net impact on CGT payments?

As an aside - this really doesnt make sense to me (but then again I guess ATO rulings dont need to make sense).

Thanks,

Matto

[Terry_w]

it does make sense.

The absence from main residence rule only applies when a person is absent from the main residence. If you are renting out rules while you are still there you are not absent so the rule won't apply.

[kiwipaul]

I've been told on another forum that if you rent a room for say $100 per week this is considered income and needs to be declared and property will be subject to CGT pro rata.

However if you take in boarders and split the cost of all the expenses between the boarders equally this is not considered income and you wouldn't be liable for CGT.

Cannot find anything on the ATO web site but I have my doubts whether this is true or just some punters way of avoiding declaring this income.

[Terry_w]

If your property is income producing then CGT may apply.

Renting out rooms would mean the property is income producing. Boarders is not because you are just letting someone stay over.

see para 17 of TR 2167
http://law.ato.gov.au/atolaw/view.ht.../NAT/ATO/00001

[matto_]

Hi Terry,

Thanks for the response.

=====
Leading on from the above - if I were to sell the aforementioned PPOR - how would the CGT be calc-ed?

=====

Additional/separate question
A different friend is talking about setting up a trust to buy a property in - and then the trust rents the property out to himself (charging an appropriate market rate).

Does this work?

[Terry_w]

Originally Posted by matto_

Hi Terry,

Thanks for the response.

=====
Leading on from the above - if I were to sell the aforementioned PPOR - how would the CGT be calc-ed?

Does this work?

Do you mean, if he lived in it for 1 year and then rented out 2 rooms?

I would think the first year would be CGT and then possibly 2/3 of the property would be subject to CGT (assuming 3 bedrooms and tenants shared rest of house.

=====

Originally Posted by matto_

Additional/separate question
A different friend is talking about setting up a trust to buy a property in - and then the trust rents the property out to himself (charging an appropriate market rate).

Does this work?

This works, but whether the trust can claim costs associated will depend on a number of factors. There is an old TR where the ATO warns against renting from your own unit trust - ie they are looking closely at the arrangements.

If it is a discretionary trust then it may work but the trust may end up with a loss and if it was no other income then this loss won't help save any tax.