Taxing rental income

Our Experts Answer:

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.