Question: We are moving interstate and own a property with a $300,000 mortgage that we would like to keep as an investment property. I would like to know:
(1) Is it true that if we keep this as our primary residence we won’t pay capital gains tax if we sell within six years.
(2) Can we claim tax deductions connected with renting it out (interest payments, maintenance, rates, depreciation etc) if we keep it as our primary place of residence?
Answer:
(1) Yes, you can keep it as your primary residence. And if you do so, you won’t pay capital gains tax if you sell within six years.
(2) When you rent the property out, the rents will become taxable income and the outgoings and expenses you mentioned can be claimed as tax deductions.
Tips:
(1) The principle component of your mortgage isn’t deductible, so you may want to consider switching to an interest only loan once rouse becomes available for rental. This will reduce your out-of-pocket costs.
(2) You might want to get another loan to renovate the property because the the interest is also deductible. The renovattion will give you a better rental return and increase the re-sell value of the property.
(3) Deduction can be only claimed on the outstanding mortgage amount – not the value of the property. For example, the property was purchased for $350K on a $300K loan. 3 years later house worth $380K and loan down to $280K. Then only the interest on $280K is deductible.
(4) You should have a depreciation report prepared by a quantity surveyor in order to claim depreciations. The cost is about $300 to $500 and is tax deductible.