Taxing rental income
Question from Chi updated on 4th February 2019:
My husband and I currently own an owner-occupied house with no mortgage and a rental property with a $447,000 mortgage. We are going to buy another house that we plan to rent out for two to three years before we live in it later on. The future property will be 100% home loan. I have the following questions regarding rental tax:
a) For the financial year end tax return, will the rental income be a combined rental income of all the rental properties? Can I claim interest expenses from all my combined mortgage interest (interest claim from existing $447,000 loan and new loan combined) assuming the existing rental property will make a profit and the new rental property will make a loss?
b) If we move into the future house in a few years’ time and our current owner-occupied house then becomes a rental property, will the rental income be the combined rental incomes of all rental properties? Can I still claim interest as expenses from my existing mortgage and my new mortgage (from the future house)?
Our expert Matthew Gilligan responded:
Firstly, rental income is taxable, so combined rental income of all rental properties will be included in your tax returns. Expenses incurred in deriving that income are deductible for tax purposes. This means the interest on the $447,000 loan is deductible if that money was borrowed to buy the property producing the rental income. Similarly, interest on the new loan will be deductible on the basis that it has been borrowed to buy the new property, which is producing rental income. If one property makes a profit and the other makes a loss, then you will either have tax payable on the net difference or a net tax loss.
Secondly, all rental income is taxable. If your current owner-occupied house becomes a rental property, the rent you derive from that will be taxable income. The issue that you will face in the future is that the interest on the money borrowed to buy the home that you rented for a few years, but then moved into, will cease to be deductible. You are going to need to seek advice at the time as to whether there is anything you can do to get a more effective outcome.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.
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