|Monday, April 07, 2014||(Comment)|
How to negatively gear your home
Move out of it, let it to tenants, and rent another place.
In Australia, if you buy a property and let it to tenants, you can claim the mortgage interest,* council rates, and other related expenses against your taxable income, even if the outgoing expenses exceed the incoming rent (“negative gearing”). In effect, the current loss on your rental property is deductible against your other income, although it is not incurred for the purpose of earning that other income. Meanwhile the cost of commuting to work is not deductible against your wage/salary income, although it is incurred for the purpose of earning that income. Go, figure.
But if you're silly enough to buy a home to live in, you can't claim any part of your mortgage interest or other outgoings against your taxable income, even if the outgoings exceed the rental value of the home — as they often do.
But there's a way to level the playing field. If you let your home to tenants, collect the rent, and pay an equal amount to rent an alternative place of residence, then the incoming rent cancels the outgoing rent, but any margin by which the incoming rent falls short of the interest and other expenses becomes a deduction from other taxable income.
It may seem a big call to move out of your home solely in order to claim negative gearing. But what if you have to move anyway? Are you going to sell your home and buy another, pay an agent's commission, pay stamp duty, pay conveyancing fees, and waste the opportunity to negatively gear? Or are you going to avoid the costs and seize the opportunity by letting your home to tenants and renting your new address? If you choose the latter, you can spend a fraction of your savings to buy any special security or flexibility of tenure that you may need at your new address. Thereafter, every time you move, you can do it in the rental market without incurring stamp duty, commission or fees.
If you let out your home, will you start paying land tax and rental management fees? Probably; but that's all income-tax-deductible too — unlike stamp duty, commission or fees if these are incurred on your principal residence.
If you live away from your property for long enough, will you have to pay capital gains tax on any eventual sale? Only if you actually make a capital gain! No such safeguard applies to stamp duty, commission or fees.
Of course, if the Federal Government disallows negative gearing for purchases of established homes, as many critics recommend, and if the inevitable grandfathering of existing arrangements does not extend to future decisions by current owner-occupants to let their homes to tenants, then the above strategy will no longer let you claim negative gearing. But it will still let you avoid stamp duty, commission and fees.
* To the extent that the borrowed money was spent on the property, not on other things.
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