The main deductions are the stamp duty, mortgage interest and depreciation. The first two we are going to pay ourselves anyway and so aren't actually additional costs while the latter is probably not a real cost, or we are going to suffer it anyway. Next there are property management fees, which might help in getting a tenant fast etc. and the difference between land tax on investors and rates on owner occupiers. There are real extra costs.
Assuming we could rent the house for one year at $650 a week we would earn $33800 in rent. So, the net income is -$34k and the tax saved at 40% is $13.5k. On the other hand we make $33.8k we would otherwise not have, but pay $25.8k in rent on our existing apartment that we would not have to pay if we lived in the new house as well as $3.7k in extra actual costs. So the net financial gain is $17.8k.
Let me know if you think I got something major wrong.
So, if we don't do this, economists would say that our revealed preference shows that the utility of living in our new house a year earlier and avoiding dealing with the hassles of being a landlord are worth at least $17.8k to us. For me, $17.8k is about 1.2% of net worth and so it's not enough to make a difference. It's not a lot more than our after tax salaries for one month. I asked Snork Maiden how big the number would have to be before she would be willing to do it and she said $50k. I know that if it was $100k I probably would do it :)
2 comments:
Don't forget the possible CGT implications if you treat it as an investment rental property before later on moving in to it. (https://www.ato.gov.au/general/Capital-gains-tax/)
Although there is a CGT exemption if you continue to own one house for six months after buying a new one (eg. you buy a new home and then have to sell the old one), there is no GCT exemption if you rent out the home as an investment property for a period and then move into it.
Also, I believe it is a simple pro-rata calculation, so if you rented out the new home for 1 year and then sold it 20 years later, you'd be up for CGT on 5% of the overall capital gain. A bit hard to estimate that cost now, but it would reduce the real benefit of renting your new house out for a year before moving in.
Also, although your current rental unit rent is less than the rent you expect to get renting out the house, for a comparison of the benefit you should either use the same notional rental income from the house and rent paid or else treat the difference in rent amounts as another benefit you are choosing to forgo (ie. the unit rent is less than the house rent presumably because it has less utility to a typical renter - and that is separate from the perceived utility of moving into your own home immediately rather than delaying it for a year).
ps. Don't forget to change your insurance from home owner to landlord insurance, or you may get a nasty surprise if you home has a fire etc. while it is being rented out. You also probably took out the home loan on the basis of it being for an owner-occupied property rather than an investment property, although I don't think the lenders care too much about that in practice (although I think there are some protections for owner-occupiers that don't apply to investment property loans - not sure under what circumstances they might come into play though...)
Thanks EW, these are some extra things for anyone thinking of doing of this to think of. We aren't going to do it :) I didn't know that the tax system would remember the period when you rented your house out many years ago when computing CGT. I guess it makes sense to stop people moving in for one year before selling their rental property to avoid CGT. I deliberately only put financial amounts in this calculation so that at the end you have the financial gain or loss which you can weigh up against your willingness to pay to move in right now rather than waiting a year. That includes the hassle aspect, and the difference in utility of living in a bigger house twice the size of our apartment where you can make some changes to the house and garden or smaller apartment where you are more restricted etc.
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