Renovate rental property or sell?
Question from Ann updated on 20th September 2013:
We have a rental property in a prime area, it's been under LAQC since 2004. It was bought for $300,000 (GV is $450,000) and has a mortgage of $220,000. It is currently tenanted but is badly in need of updating especially the kitchen and bathroom. The house we are living now is under a trust but not in a good location. We want to move to a better area sometime at the end of this year. What should be the best way to go about doing this for tax purposes? Sell our current house and renovate the rental place so we can move in or should we sell both and find another dwelling?
Our expert Mark Withers responded:
Ann, I can't really hope to answer your question with those limited facts and the answer probably has little to do with tax. You could start be calculating the opportunity cost of holding the existing properties though. The opportunity cost is the cost of not doing something alternative with your capital. To calculate it for each property start be determining the fair market rental, then subtract your usual holding costs of rates, insurance, management and maintenance. This will leave you with the net income from the property. Divide this into the market value of the property to determine your net yield. Next, compare the net rental income with the interest you would save if you sold the property and reduced debt. The difference between this and the net rental income is the opportunity cost of keeping the property rather than selling it to reduce the debt you would otherwise have to take on to buy a new house. There are no right or wrong answers but obviously the lower your yield relative to the interest rate you pay on your debt the higher the opportunity cost of retaining the rentals will be.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
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