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Could I Cut Costs By Renting Out My House?

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Contributor:
Mary Holm
Mary Holm

Question:

I am a female, 61 years old with three jobs trying to keep my head above water. I'm thinking how ludicrous this is at my age.

I
have two mortgages totalling $110,000 and $300,000 equity in my home. I
have a small retirement fund, amounting to less than $10,000. I have
joined KiwiSaver. I have got high repayments trying to get the
mortgages paid off before my retirement.

My salary is
$42,000 plus commission of less than $50 per week. Extra jobs earn $150
per week. Shall I rent my house out to cut costs? What do you suggest?
I am a single-income earner.

Answer:

Mary Holm: Good on you for working so hard to get rid of those mortgages. Still, you must get sick of the grind.

It's a matter of trade-offs. If you rent out your house and become a tenant elsewhere - paying less rent than you receive on your house - that may mean living in a smaller or less pleasant place.

Do a bit of research, perhaps asking a rental agency how much rent you could get for your house and looking around at how much suitable rental accommodation would cost you.

You might find something different, such as an apartment at a relatively low rent, that would be fun to live in for a few years. And perhaps it would be nearer your main job, reducing transport costs. There are several things to keep in mind, though.

First, you'll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.

And you won't be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.

Depreciation is also tricky. It might not be wise to claim depreciation on the house if you are thinking of moving back in later. If the house value grows while you are not living there, you would have to pay back the depreciation when you move back in, says PriceWaterhouseCoopers tax partner Scott Kerse.

Mind you, if you diligently put the money gained from claiming depreciation into reducing your mortgages, you would still be ahead - even if you have to later increase a mortgage to cover a depreciation clawback. That's because you've saved on mortgage interest in the meantime. Note, too, that over the next few years the value of your house might fall, which would reduce or eliminate the clawback.

Clearly, a chat with an accountant would be a good idea before you go too far along this track.

You also need to consider how you would cope with any tenant problems - not paying, damaging the property, long vacancies and so on. Some people take this in their stride, for others it's a nightmare. You could hire an agency, but that eats into your profit.

I don't mean to put you off. Your idea is not silly, and once you have things set up it could all work smoothly.

There is a simpler option, though - taking in a boarder or two. If you have one or two boarders and you charge less than $213 a week (a number soon to be raised a little) for each one, you don't have to pay tax on that income or keep records about it. If you charge more, go to www.ird.govt.nz and do a search on "boarder" to get info on taxation.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.    

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