Help: Doing tax return for the 1st time with an IP

Hello,

How are you?

I purchased my 1st home back in Jan 08. It is a 2 br apartment. I live in it and have the other room rented. I also achieved the 10K FHOG for it. I was wondering if I can still claim some tax deduction based on this situation.

Some info:

Stamp duty 6K
Other cost (solicitor, mortgage installment fee, etc) = 1.5K
Body corp (Jan - June 08) = 1K
Council and water rates (Jan - June 08) = 0.5K
Mortgage Interest paid = 5K
Building Depreciation = 2K

Total = 16K

Since I use 50% property as my home and the other 50% as an investment, can I claim a deduction of 16K/2 = 8K.

Or otherwise please advised.

Thanks,

blaze

Purchase costs must be capitalised (wiping out about half of your claim).

Then it becomes a case of how you then become liable for a proportion of the CGT on the eventual sale. How do you take into account other items such as utilities?

Although this sounds like the logical approach, my understanding is you can only claim the part of the property that is rented exclusively for the use of your tenant (i.e. their bedroom).

As you yourself use the bathroom, kitchen, etc. you are unable to claim for these areas. So if the room you rent is 10sqm of a 100sqm flat you can claim 10% of your interest payments, however you must also declare all the income you receive from letting the room. Also, you can only claim repairs for damage to that one room only, not to areas shared by both of you.

Although, I'm sure someone else on the forum can give you a much better explanation than I have!

Utilities you mean via a quantity surveyor?

10%? blah... ok so how if I drop this completely, not claiming any deduction nor any rent income, hence still can get full CGT exemption? Is this ok?

Hi There
The tax law clearly states that
"there are no tax consequences where the owner of a residence permits persons to share it on the basis that all the occupants, including the owner, bear the appropriate proportion of the costs actually incurred on electricity, food etc. Refer to Taxation Ruling IT 2167 on the ATO website. It would be much better for you to read this ruling structure your affairs accordingly and not make any claims in you tax return for interest etc. We only have one tax free asset in our life and that is our principal place of residence. If your property goes up in value and you have claimed interest etc you will be liable for capital gains tax. In the long run it is not worth it.
It is always a good idea to find yourself an accountant that is an expert on or interest in rental properties to help you do your tax. Contact the chartered accounts institute for a reference and remember you normally get what you pay for! :)

I think you will be partially liable for CGT, regardless of whether you claim interest expenses, etc. Speak to the ATO - they have a great example on their website (full details here: http://www.ato.gov.au/individuals/content.asp?doc=/content/36910.htm).

You can claim a portion of the interest, rates expenses, etc, but you should also technically then be including the rent you are receiving as part of your income.  

The example the ATO gives (similar to yours) is as follows:

If you rent out part of your home, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling.

Example

Renting out part of a home

Thomas purchased a home under a contract that was settled on 1 July 1999 and sold it under a contract that was settled on 30 June 2007. The home was his main residence for the entire eight years.

Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen which represented 30% of the home. Only Thomas used the remainder of the home. Therefore, Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home.

Note: The home first used to produce income rule does not apply because Thomas used the home to produce income from the date he purchased it.

Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt:

Capital gain

x

Percentage of floor area

=

Taxable portion

$120,000

x

35%

=

$42,000

The $42k would then be subject to the 50% deduction, because the asset has been held for longer than 12 months. So $21k would be added on to Thomas's taxable income for that year - if he was on the 30% tax bracket, he'd have to pay $6,300 in tax.

Blaze,

You cannot claim deduction on $6k stamp duty and solicitor fees (it will reduce your capital gain instead).  You could claim 50% of other expenses but will also have to declare rent income received.

You have to weigh up whether it is worth renting out one room (and getting relatively small tax refund each year) versus capital gains tax upson sale of your property.  You will lose 50% of PPOR CGT exemption if you rent out 50% of your PPOR.

Regards,

Kevin Thang| Chartered Accountant & Principal of Edvico Mortgage Solutions | Suite 5, 28 Belmore St Burwood 2134 |
Tel (02) 9744 0066 | Mobile 0403 268 963 |Email kevin.thang@edvico.com.au | Edvico Pty Ltd | ABN 13 129 124 732