Is it better to sell or rent home when moving

[V8kado]

We (+wife, two kids) have been offered a great oppertunity to house sit a property for the next 2-3yrs for minimal rental outlay and are seeking some advice about renting our current home out, or selling?

I own a 3 bedroom home here in Queanbeyan (ACT border) with approx $140,000 owing. Current loan repayment is only $565 f/n. Our house has been valued at between $400,000 - $440,000 to sell now, and rental income is valued at around $420 - $440 p/w (lets say $840 f/n) if we were to rent in the current day.

We are struggling to figure out the Pro's and Con's for the above situation.

This question may be clear cut for some people, but we really have no clue about this and the consequences involved. Words such as Equity, Negative Gearing, Tax Advantages, Capitalisation etc etc have no meaning to me! Please explain?

All I see in this senario is if we rent our home we would make $275 a fortnight profit ($7,150 yr) which we could put straight back into the mortgage. (Tax paid on this????)

Anyone who can give solid advice would be greatly appreciated?
I've tried to give as much info as possible but if there is something missing just ask away!

Cheers

[Brodes]

I'm in a similar situation. I've had to move town for a new job & had to make the same decision. I've chosen to rent mine out, the main reasons why are.....
You're using someone elses money to pay your loan off.
Any expenses at all can be claimed on tax (even trips to the property for what ever reason, so every trip I make back to town, I'm claiming 0.65 cents expense for every Km travelled & with a 250km trip this helps out heaps).
The more money you earn from the rent over time is an amount added to the total you've earnt once sold eventually.
It's not a good time to sell at the moment as the values are down (in my area at least).
Because I still own that property it's seen as an asset to the banks, banks love assets which will help you in the future if you ever need to borrow money again.
And a few more reasons....
But everyone's situation is different, my advise is that if you're not totally sure about what to do, then it's probably best to go see a good accountant, they are worth every cent.

Hope this helps :-)

[Pepscobra]

Originally Posted by Brodes

The more money you earn from the rent over time is an amount added to the total you've earnt once sold eventually.

Sorry, but I just have to correct you on this... Rent earned during the period of it being rented does not affect the amount of Capital Gains tax you pay.

CG tax is determined simply from the cost of selling take the cost of buying. And this is further affected by the ratio of time you lived in the house and had it rented during the period of ownership.

[Pepscobra]

I won't call myself an expert, but I do have a few investment properties so may be able to offer some advice. Here goes...

In my opinion, if you can afford to hang on to a property, than I would. It's just my attitude towards property. The costs of buying/selling property (agents fees, stamp duty, etc) take a while to recoup. Property is historically generally a good long term investment.

Most people in Australia who buy/own investment properties usually have them 'negatively geared' this simply means that the cost of holding the property (interest payments, maintenance, etc) are greater than the income earned from the property (ie rent). The benefit of this is that these losses can be offset against your personal income and reduce your income tax.

However, in your situation, it seems that your property will be positively geared if you rent it out. This means that it may earn more than it costs you to hold it. This may sound good, but the extra income will add to your personal income and may increase your tax.

Also, when you rent a property out it becomes subject to land tax (depending on which state) and if you decide to sell it later on, you may have to pay capital gains tax. If you sell a property while it is your personal and primary place of residence, you wont pay capital gains tax.

For alot of people, property isnt just about financial sense. There are also emotional factors. If you have no emotional attachment to the house, it may make more sense to you to sell and pocket a nice profit and use the money to enjoy some other things in life.

If you wish to keep the house, there are other options of releasing some cash using the equity, but this needs more detailed explaination and I would recommend speaking to a professional advisor.

Hope the above helps. Cheers.

[Pepscobra]

Oh by the way, Equity is just a fancy word for saying how much value you hold in the property (value minus loan). In your case your house is worth $400k and the loan is $140k... Therefor you have $260k equity.

You can always use this equity to redraw cash. Most banks will safely let you redraw up to 80% the value of the equity in cash (you pay interest on it of course) or you can use the equity as security on another purchase or loan.

But as I mentioned before, best to get some professional advice on this. Get in contact with an independant mortgage broker... They may not mind explaining these things in greater detail. Or post more specific questions here and I'll do my best to help.

[Pepscobra]

I forgot to add some obvious pros of renting out a property:

1. All maintenance expenses on the property are tax deductible while it is rented including, as has been stated above, travel expenses to the property,
2. Depending on the age of the house, you can actually depreciate the value of the house and offset this against your tax.
3. The extra income. Now you will pay more tax on this extra income, but tax isnt all bad... It means you are making money!

[hawker]

I would also hold onto it, because QBN is a good area to rent. Once people realize how hard it is to actually find a place to rent in the ACT, without selling vital organs, they look to QBN and Jerra. We did, we were paying $370 a week for a 2 bedroom flat in Jerra, which sounds like a lot, but over the border, we were looking at 1 bedroom places that you can hardly fit into for $410-$430 a week. Insane. But that's the market.

Don't forget you can start your rent lower and increase it every year or so. That's what our landlord did to us, we left just as they wanted to increase it to $390. I thought they'd decrease it again to get someone in, but about 30 people came to inspect it and they had someone ready to move in as soon as we moved out at $390.

The only time you have to worry about is when they cut a heap of government jobs. They just cut a few, but I don't think it's enough to put a dent in the market.

[Yellow_Festiva]

Rent it, move back in after your stint. You most probably fit into the '6 year rule' regarding capital gains, meaning you don't pay it.

Get proper advice on this of course.

[GT0132]

My view is to keep the place as it seems it won't cost you any more in accommodation costs, so its not as if you'll struggle to keep it.

While you will make a profit due to the property being positively geared, rather than a loss (negatively geared), I wouldn't let that be a concern because, depending on your tax bracket, you get to keep 54% of the profit . However with a loss you only recoup 46% of it...ie, you still lose.

Now because the property will be positively geared it makes sense to have the property in the name of the lowest income earner to minimise the tax paid , depending of course on how this may affect their entitlements to certain benefits (ie family allowance etc). However if it is in joint names the profit will be split 50/50 for tax purposes - profit being rental income after deducting the allowable property outgoings.

You may not be liable for CG tax under the 6 year rule as mentioned by Yellow Festiva. However CGT is not dependant on the property being a rental , it is applied to any property that is not exempt under the primary residence provisions.

Land tax usually won't apply unless the value of your overall land held in the relevant state exceeds a certain threshhold (which is different for each state). Having only one investment property in the ACT shouldn't trigger land tax, but I'm not familiar with the rates that apply in that territory, so you need to check.

[deesun]

Originally Posted by GT0132

Having only one investment property in the ACT shouldn't trigger land tax, but I'm not familiar with the rates that apply in that territory, so you need to check.

Queanbeyan is in NSW. oops

[deesun]

In most places the market is currently still soft so you could be selling in the down market. Within the 2-3 years the market might come back and you will be buying in the high market, bad news. It will cost you thousands in agents fees when you sell, more bad news. It will cost you in solicitors fees when you buy, more bad news.
Rent the property, do some maintenance and take the tax advantages. Be carefull with what maintenance you do as it may be an asset to be depreciated rather than a total tax deduction, but I'm not 100% sure on that one. Personally I wouldn't sell, too many positives.

[Rambunctious]

I've had a read through all the answers and everything is just about covered except how you have done your calculations.
Here's how it works......

Total income............................................ ...........$840x26= $21840.
Less Agents cost to obtain tenant(one weeks rent+gst).........= $462
Less Agents weekly fees(9-10% incl gst)............................= $1966
Less Rates and Insurance................. = $ 4000 ??
Less maintenance/repairs........................................... .....= $ 1500 ??
Less loss of rent/unpaid rent............................................= $ ???
Less interest on loan(not principal)..($140000@6.5%)...........= $9100
Total.......let's say............................................... ..........= $4812

The figure of $4812 is profit and that gets added to your taxable income split half each with your wife if the home is jointly owned.
If you don't want to pay tax you may be able to pay interest in advance but as some have said, spend the time and money and ask an Accountant to verify what has been said.

[Pepscobra]

Would someone mind explaining the '6 year rule' please in relation to Cap Gains Tax?
Cheers.

[Chilliman]

Originally Posted by Pepscobra

Would someone mind explaining the '6 year rule' please in relation to Cap Gains Tax?
Cheers.

You can claim a property as exempt from Capital gains tax, if you are not using it as your residence, for a period of up to 6 years. That only applies to one property at a time (if you hold multiple properties).

So you could move out of your home, rent it out while living somewhere else, then sell your original home after 5 years and not pay Capital Gains on it.

[GT0132]

The place must have always been your place of residence from the time you bought it. If not then you pay CGT on a pro rata basis for the time it was rented out. If you rent it out for more than 6 years you pay CGT for the proportion of time it was rented out. If you don't rent it out at all, the exemption lasts indefinitely.

You can also move back into the place just before the 6 years is up and then move back out at again at which time the 6 year clock starts ticking again. This can be repeated an infinite numbe rof times. The rule was designed to acknowledge those who transfer for work so as to not disadvanatage them if they eventually sell their home.

[V8kado]

Big Thanks to all the input and very proffesional advice, very much appreciated! You have all certainly cleared some burning questions I have had, thanks!

I have taken the advice and called a couple of accountants for some proffesional advice and an appointment soon.

Renting certainly does sound like a very sound and secure option. Thanks, it will certainly be closely concidered.

Just one other thing to add which I did not mention before is we are seriously concidering purchasing another larger home after the 2-3yr stint house sitting, which would mean more than likely having to then sell our current home to fund the new property. Whether this makes a difference to my senario, I'm not sure of? Would this ^ effect not paying the CGT as we did not move back in and then have to pay CGT? What other implications would we run into which haven't been mentioned?

Also, dont think this has been covered yet and I'm asking just to cover all bases. What IF I do decide to sell the property and have about $250,000 sitting in the bank. Is this something worthwhile doing for the 2-3yr stint? I mean would I be earning interest from the bank and making money whilst doing nothing? As I said just another senario spinning around in my head! Advice

All input has been valued greatly and I'm very thankfull to all posters.
Any more contribution is very welcome.

Cheers

[GT0132]

Originally Posted by V8kado

Just one other thing to add which I did not mention before is we are seriously concidering purchasing another larger home after the 2-3yr stint house sitting, which would mean more than likely having to then sell our current home to fund the new property. Whether this makes a difference to my senario, I'm not sure of? Would this ^ effect not paying the CGT as we did not move back in and then have to pay CGT? What other implications would we run into which haven't been mentioned?

Also, dont think this has been covered yet and I'm asking just to cover all bases. What IF I do decide to sell the property and have about $250,000 sitting in the bank. Is this something worthwhile doing for the 2-3yr stint? I mean would I be earning interest from the bank and making money whilst doing nothing? As I said just another senario spinning around in my head! Advice

Cheers

If you sell the house no CGT will apply unless you go over the 6 year period. It doesn't matter if you don't move back into it after 2-3 years , provided it has been your residence from the time you bought it until the time you start renting it.

As for selling it and investing the proceeds, you need to weigh up the 4% interest you'll get from the bank on the $250k versus the rent and potential capital gain you will miss out on from being a landlord, remembering you won't have any interest costs to worry about if you sell but you will pay tax on the interest.

If you get a good offer selling may be an option given the property market is quite flat at the moment and the likelihood of any capital gain in the next 2 years is questionable and even more unlikely after seeing how things in Europe are being played out atm.

[BPXR6T]

Rent it out. The ATO will skin you alive if you have money in the bank. I received very threatening letters from the ATO demanding I pay quarterly lump sums to them as tax on the interest I'm earning. That aside property is a better investment than say term deposits. I won't go near shares with anything other than super as I see the share market as no better than horse racing in these times we live in.

[BFZ Wagon]

I wholeheartedly agree with V8kado. Awesome advice guys.

As a fellow home owner myself, It's interesting to find out the ins and outs of renting out a property (incl benefits of doing so etc) as opposed to selling it.

I like the idea that the cost of maintenance on the property (when rented out) can be claimed on tax. That can't be done when you live in the property. Which is a shame.

Keep us informed on your progress mate.