There is a popular version of rentvesting that sounds almost too good: rent out your home, have tenants cover your mortgage, move somewhere cheaper, and build wealth tax free. It is an attractive idea. It is also, for most people, a cashflow fantasy dressed up as a strategy.
Here is what the numbers actually show, and where the real opportunity sits.
Under the Income Tax Assessment Act 1997, Australians can treat a former home as their main residence for up to six years while renting it out, provided they do not nominate another property as their principal residence during that period. Renting your next home satisfies this condition. On sale within that window, the capital gain is fully CGT exempt. That exemption is worth potentially hundreds of thousands of dollars on a well located property. It is the engine of this strategy, but not the cashflow.
Using fictional numbers as an example, take a property generating $1,500 per week in rent, $78,000 annually. After property management, rates, insurance, maintenance, and interest on a $400,000 owner-occupier loan at roughly 6%, around $41,130 in costs remain. The net taxable rental income of approximately $36,870 then attracts income tax at your marginal rate.
That rental income pushes total taxable income up significantly and, depending on your tax bracket, can span two tax brackets and generate a substantial additional tax bill. The gap between what the property generates and what accommodation costs is funded from salary, not from rental income.
Rentvesting under the 6 year rule is a capital growth play with a tax free exit, not a cashflow neutral lifestyle arrangement. For those with strong equity, a long horizon, and genuine growth prospects on their property, the CGT exemption alone can dwarf the cumulative cost to carry over six years. Know what you are actually buying before you commit to the strategy.
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