Exploring Strategies to Boost Your Property Cash Flow
In today’s dynamic property market, homeowners are increasingly exploring ways to enhance their cash flow. Two commonly considered approaches involve either renting out a room in your Primary Place of Residence (PPOR) or opting for a rentvesting strategy by living elsewhere while renting out the entire property.
Comparing Tax Deductions and Annual Expenses
The table below outlines a comparison for a 2-bedroom apartment in Australia, illustrating the tax and expense implications of both strategies:
| Expense Type | Annual Amount | Claimable if Renting 1 Room (50%) | Claimable if Rentvesting (100%) |
|---|---|---|---|
| Loan Interest | $31,252 | $15,626 | $31,252 |
| Water | $1,820 | $910 | $1,820 |
| Council Rates | $2,050 | $1,025 | $2,050 |
| Electricity | $2,379 | $1,190 | $2,379 |
| Body Corporate | $7,832 | $3,916 | $7,832 |
| Depreciation | $5,000* | $2,500 | $5,000 |
| Total Deductions | $25,167 | $50,333 |
* Depreciation is an estimate and depends on the building’s structure and fittings.
Tax Implications
Renting Out One Room in Your PPOR
- You can claim 50% of the expenses for the period the room is rented out.
- Rental income from the room must be declared (e.g., approximately $515 per week or $26,780 per year).
- This method partially reduces the Capital Gains Tax (CGT) exemption when you decide to sell.
Rentvesting Strategy
- As the property becomes fully income-producing, you can claim 100% of the expenses.
- Full rental income is declared (e.g., approximately $1,030 per week or $53,560 per year).
- You are liable for CGT, though you might reduce this using the six-year rule if you initially lived in the property.
Lifestyle and Cash Flow Considerations
| Factor | Renting a Room in PPOR | Rentvesting |
|---|---|---|
| Privacy | Less privacy due to shared living space | Full autonomy as you reside elsewhere |
| Deduction Scale | Partial (pro-rata) | Full (100%) |
| CGT Impact | Partial CGT exemption | Full CGT liability (or eligibility for a six‐year exemption) |
| Rental Income | Approximately $26,780 per year | Approximately $53,560 per year |
| Tax Deductions | Approximately $25,167 | Approximately $50,333 |
Final Considerations
- Renting out a room in your PPOR provides additional income but comes with limited tax benefits and a reduction in your CGT exemption.
- Rentvesting offers the potential for more significant tax deductions and higher rental income, which may lead to faster wealth accumulation, though it involves managing stricter CGT obligations and rental responsibilities.
Need help modelling your numbers? Chat with our team to compare cash flow, tax outcomes, and CGT scenarios tailored to your property.
