Live in your own house or rent someone else's?


I posted a video yesterday discussing how the numbers for the granny flat we just built end up. I run through the costs, the mortgage, rent, bills and property management. You can view that video here.

Following on, the numbers are pretty good. About $150 in positive cash flow each week just for sacrificing some of our backyard and that's without taking in to account the depreciation the property will attract over 40 years. If you are going to claim depreciation (highly encourage exploring the option as it is a great tax deduction at virtually no cost) you will need to get a quantity surveyor to complete the report for you.

I mentioned we were considering renting our own house that we currently live in and renting another property for us to live in and I briefly mentioned the tax incentives of such a move were favourable. The idea is this, we could rent our house to someone for approxmately $450 a week. We could then rent another house of a similar size and style for $450. The cost is exactly the same every week, bills will still cost the same, virtually nothing changes cost wise but you gain the ability to claim the expenses against the house you own as deductions against your taxable income.

If you assume it costs you $800 a week to live in your own house (interest charge on your mortgage, bills, odd repairs etc.) Your total expenses are $41,600 a year, no tax deductions are available though. Now assuming you lease your property for $450 a week ($23,400 a year) you have a loss of $18,200 a year which you can use as deductions against your taxable income thus lowering the amount of tax you pay. 

The ATO doesn't care if you rent a house to live in or whether you pay off your own mortgage. If someone renting your house though you're entitled to claim any expenses. That's the catch. You can pay $450 to rent somewhere or $450 to live in your own house but you can only claim the losses against your income if some rents your house. If you were the sole owner of your house and earnt $100,000 a year, in the above scenario your taxable income reduces to $81,800. An approximate saving of $6800 in tax payable.

The sticking point with a scenario like this is if you are going to sell there are possible Capital Gains tax implications. If this is something that interests you it is important you seek financial advice from an accountant or financial planner.