New home's tax back?

Question from Shane updated on 30th October 2014:

My wife and I are looking at building a new house to move into and renting out our current property. I am told that we will not be able to claim any tax back on the newly built house. Is this correct? If we rented the new house, how much could we claim back on a $500,000 build? If we where to move into the new house a year later and rent our current house, would we have to pay any of that tax back?

Our expert Mark Withers responded:

No deductions are available associated with the private or domestic occupation of your personal dwelling. If moving into the new property means you then rent out the old one you can begin claiming deductions from the point it is available to rent. With regards to interest, only interest on debt used to acquire the old home is deductible. Your question doesn't make it clear what your debt position is or whether money has been borrowed to build the new home. If you do rent out the new home deductions can be claimed including interest on any debt that funds the acquisition of the home being rented. Depreciation of buildings is no longer an available deduction. If you subsequently move into the new home a deemed disposal occurs. This will not result in any deductions previously claimed being disallowed and if no depreciation has been claimed no recovery of this will be triggered by moving in. The key consideration with this type of plan is generally to determine which debt funds which property, remembering that the question is not which property is providing the security for the lending. If you have borrowed for the new home and have equity in the old home you may be best to consider a restructure of the rental property that may involve selling it to an entity that borrows to buy it. This may free up your capital so that you can reduce the private debt on the personal dwelling and achieve a legitimate interest deduction against the taxable rental income.

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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