Rentvesting Cash Flow, Calculated

Key takeaways

• Compare TOTAL housing cost, not just the investment property in isolation.
• Include the rent you pay - it is the cost of the strategy.
• The tax effect is real but it is a refund of a loss, not a gain.
• You lose the CGT main residence exemption on the investment property.

What goes into the calculation?

Illustrative annual figures. Substitute your own - the point is the structure of the comparison.

That final figure is the number to compare against what owning your own home would cost - interest, rates, insurance, strata and maintenance, with no rent received and no deductions.

What do people get wrong?

• Forgetting the rent they pay. The investment property looks affordable in isolation, but the strategy includes paying someone else's mortgage.
• Treating the tax refund as income. A negatively geared property returns a portion of a loss. You are still out of pocket - just less than the headline suggests.
• Assuming full occupancy. Budget for vacancy. A few weeks between tenants is normal.
• Underestimating maintenance. Owners of their own home defer repairs; landlords cannot, because of minimum standards obligations.
• Ignoring the main residence exemption. This is the big one - see below.

What is the capital gains tax consequence?

Your main residence is generally exempt from capital gains tax. An investment property is not.

A rentvestor holding an investment property and renting where they live has no main residence to exempt, so the entire gain on the investment property is potentially assessable - reduced by the 50% CGT discount if held more than twelve months, and further affected by capital works deductions claimed, which reduce the cost base.

Against that, the six-year rule can apply if you lived in the property first and then rented it out, which is a materially different position from buying it as an investment from the start. Whether either applies to you depends on your specific history with the property.

This is genuinely accountant territory. The cash flow calculation above is arithmetic you can do; the tax consequences over a decade are not, and the difference between structuring it well and badly is large. Get advice before buying, not after.

Frequently asked questions

Is rentvesting cheaper than buying where I live?

It can be, where rent in your preferred area is low relative to the cost of owning there. The comparison must include the rent you pay plus the after-tax holding cost of the investment - not the investment property alone.

Do I lose the main residence CGT exemption?

If you never live in the investment property, it does not qualify for the main residence exemption, so the gain is potentially assessable subject to the 50% discount for assets held over twelve months. Your accountant can explain how your circumstances apply.

How much should I budget for vacancy and maintenance?

Allow for some vacancy each year and a maintenance allowance rather than assuming neither occurs. Rental minimum standards obligations mean landlords cannot defer repairs the way owner-occupiers often do.

Is a tax refund from negative gearing a good outcome?

It is a partial recovery of a loss, not a gain. A negatively geared property costs you money each year and the refund reduces that cost. The strategy relies on capital growth exceeding the cumulative holding cost.

Related reading

• Rentvesting: Buying Where You Can Afford, Living Where You Want
• Negative Gearing: After-Tax Cash Flow Worked Through
• The Break Cost Formula on Fixed Loans

Sources

• Rental properties guide — Australian Taxation Office
• Capital gains tax - main residence exemption — Australian Taxation Office