Can somebody please explain how having two PPORs works?

[wylie]

I've heard it said on this forum that someone can have two PPORs but not nominate which will be called the PPOR until time comes to sell one. This has always confused me, so I hope this is not a silly question...

If our son decides to move out of his house after a year there, having satisfied the obligation regarding the cheaper stamp duty, can he buy a cheaper place to live, say a two bedroom unit, and rent out his first house?

He would have two houses, both would have been his PPOR from the time of purchase, but the first one is now an IP so he can live in the cheaper one to get on top of his finances.

I believe he doesn't need to choose which one is to be treated as his PPOR until time comes to sell one of them, or am I getting confused?

1. Can he buy the cheapie unit to live in and get the discounted transfer duty, as he will move into it immediately and rent out his current PPOR?

2. When he can more afford to or want to move back into the larger first PPOR, say he starts a family, can he then rent out the unit, which becomes an IP?

3. Does the "six year absence" rule work in this situation? Say he moves back into the first house in five years, does it stay capital gains tax free, and the unit then becomes the property that will be deemed to have been an investment and he would pay capital gains tax on it.

I think I might be confusing two "rules" here, but where else to go for the right answer that Somersoft?

 

[Terry_w]

income tax legislation refers to a 'main residence' - PPOR is from the old act.

It is impossible to have 2 main residences at the same time. There can only be one main.

But the legislation allows a person to be absent from a main residence yet still count it is the main residence. So at any one point in time there could be 2 (or more) properties which could have once been the main residence and each still qualify as a main residence, but only 1 could actually be the main residence at any one point.

 

[redwing]

If our son decides to move out of his house after a year there, having satisfied the obligation regarding the cheaper stamp duty, can he buy a cheaper place to live, say a two bedroom unit, and rent out his first house? Yes

He would have two houses, both would have been his PPOR from the time of purchase, but the first one is now an IP so he can live in the cheaper one to get on top of his finances.Once the first one becomes an IP, its no longer his PPoR, the new one will be?

Is it worth getting a valuation once the 1st property is no longer his PPoR for any CGT reasons later down the road?

 

[wylie]

It is impossible to have 2 main residences at the same time. There can only be one main.

But the legislation allows a person to be absent from a main residence yet still count it is the main residence. So at any one point in time there could be 2 (or more) properties which could have once been the main residence and each still qualify as a main residence, but only 1 could actually be the main residence at any one point.

Thanks Terry. Am I correct in my idea that he moves out, gets the PPOR valued, rents it out, and it becomes an IP while he is living in a new place which he now calls his PPOR (main residence). Can he get the owner occupier transfer duty reduction for this second purchase?

Say in five years, he is married and needs the original PPOR, moves back in and it becomes his PPOR again. His second house now becomes an IP, and at that time, he would get a valuation so that going forward the gain on it is taxable only from when it becomes an IP?

So under the scenario described above, the first house he is now living in would never be subject to capital gains tax, and the second house that he has lived in but is made an IP when he moves back into the first one would be subject to capital gains tax from the time he leaves it and rents it out, to go back to the first one.

This stuff is so confusing, but I've read here on SS that at time of sale of one or the other, the decision needs to be made as to which of the two houses he has lived in as PPOR will be capital gains tax free (assuming he moves back into the first house within six years to reset the clock).

Or am I missing something?

Is it worth getting a valuation once the 1st property is no longer his PPoR for any CGT reasons later down the road?

Thanks Redwing. If he goes ahead with this idea, we will get a valuation when it becomes an IP (in case he doesn't ever move back in). I've learned that here on SS (how do people get on who aren't on this forum)?

 

[WattleIdo]

Just keep the 6 year rule going on both properties and decide which one is ppor when the time comes to sell.

 

[Terry_w]

So under the scenario described above, the first house he is now living in would never be subject to capital gains tax,

Not necessarily.

 

[Propertunity]

It is impossible to have 2 main residences at the same time. There can only be one main.

Except for the "6 month overlap" rule, where you are selling one PPOR which isn't sold yet, but you have already moved into your new PPOR.

 

[Terry_w]

Except for the "6 month overlap" rule, where you are selling one PPOR which isn't sold yet, but you have already moved into your new PPOR.

It is still physically impossible to have 2 main residences. But s118-140 allows a person to briefly count an overlapping period for CGT purposes.

 

[redwing]

So under the scenario described above, the first house he is now living in would never be subject to capital gains tax

I thought it was apportioned depending on status (Time as Main residence or Investment Property), so you get a partial CGT exemption depending on days x status

 

[Terry_w]

I thought it was apportioned depending on status (Time as Main residence or Investment Property), so you get a partial CGT exemption depending on days x status

Depends if lived in first and whether it was counted as the MR during this time.

 

[wylie]

Ok, I'm still confused.

If he moves out of his PPOR next month and rents it out, moves back home and looks for a new PPOR, gets a valuation in case he ever needs to know its value at time of turning it into an IP, he can claim interest on his loan and depreciation while it is rented out?

He can then buy a little unit to live in himself and pay stamp duty at the reduced rate (not IP rate)?

He lives in the new unit and before six years is up, he could move back to his first house to keep it CGT free?

If he does this, then does the first house remain his PPOR for that whole time if he nominates it to be that?

What about the five years that he has lived in the second house. I'm guessing when he sells it, that second house is treated and taxed as his IP, so he would pay CGT since the day he bought it, even though he lived in it from day one.

At this stage, when he moves back into his first house, or sells one or the other, he chooses which will be treated as his PPOR and this decision can be made by him depending on how much gain each house has made?

Am I getting close?

 

[Scott No Mates]

Have a look at the recent Paspalley judgment. She lost.

 

[wylie]

Have a look at the recent Paspalley judgment. She lost.

Do you have a link... and does this case have anything to do with what my son wants to do?

He doesn't want to do anything wrong, but this is something often mentioned here on SS which I've never understood. Now I need to understand it if I'm to advise him what he can do legally.

 

[Propertunity]

Hi wylie,
I'm happy to give a (mostly) uneducated opinion.

If our son decides to move out of his house after a year there, having satisfied the obligation regarding the cheaper stamp duty, can he buy a cheaper place to live, say a two bedroom unit, and rent out his first house?

Yes

He would have two houses, both would have been his PPOR from the time of purchase, but the first one is now an IP so he can live in the cheaper one to get on top of his finances.

OK

I believe he doesn't need to choose which one is to be treated as his PPOR until time comes to sell one of them, or am I getting confused?

I think you are getting confused. What if he never sells either property? He'll need to nominate the PPOR turned IP, as an IP, to claim the mortgage interest on it as a tax deduction against the rental income received on it, for starters.

1. Can he buy the cheapie unit to live in and get the discounted transfer duty, as he will move into it immediately and rent out his current PPOR?

Dunno how it works in Qld., sorry.

2. When he can more afford to or want to move back into the larger first PPOR, say he starts a family, can he then rent out the unit, which becomes an IP?

Yes, the unit becomes an IP then.

3. Does the "six year absence" rule work in this situation? Say he moves back into the first house in five years, does it stay capital gains tax free, and the unit then becomes the property that will be deemed to have been an investment and he would pay capital gains tax on it.

The 6 year absence rule only works if you do not nominate another property as a PPOR - so I think the scenario you've described fails on this point.

I think I might be confusing two "rules" here, but where else to go for the right answer than Somersoft?

I'd still recommend you get a property accountant's advice for your son.

 

[wylie]

Thanks Prop (and Terry and others who have answered). I plan on speaking with our accountant but wanted to try to get it sorted out a little before doing so.

 

[WattleIdo]

My understanding is that you don't have to officially nominate a ppor until you sell it. If you live in one of your properties before renting, then you may still nominate it as ppor as long as you live in it again within 6 years of moving out. Even though you've been leasing it and getting tax concessions.
He could live in 2 or more properties concurrently as long as he lives in each one first (before leasing it) and returns to each one to live before the 6 years is up. Obviously, he won't claim CG tax exemption until he sells. Therefore, he can wait until then to decide which property he would like to have exemption, as long as he has kept to the rules up to this point. When he claims exemption, he can only claim it on ONE property. After he's sold that property, he can have another PPOR of course.
The thing is, it's not as easy as it sounds moving from one property to the next when there are good tenants involved and you're comfortable where you are. At his age, 5 or so years is a long time and a lot can happen so it might just work out for him.
Margaret Lomas and her panel are asked this question ad nauseum on her weekly program on SkyNews. That's how I know. You could ask an accountant, of course, but ask a good one, otherwise you're the one that will have to do the explaining.

 

[travelbug]

You will have one listed as your main residence for Land Tax purposes so you can't just "decide" when you sell.

 

[wylie]

You will have one listed as your main residence for Land Tax purposes so you can't just "decide" when you sell.

Thanks for these replies. For land tax, he is well under the threshold but I did also wonder about that.

He may move back home, or move in with his older brother until he needs the larger house, but he isn't keen on having a tenant possibly trash all the hard word we've all put into his house, so really he is just wondering how to get ahead, and this is one of the things we discussed.

 

[redwing]

Have a look at the recent Paspalley judgment. She lost.

I think both Marilynne and Nicholas have lost cases re: main residence and land tax issues

 

[Terry_w]

Do you have a link... and does this case have anything to do with what my son wants to do?

He doesn't want to do anything wrong, but this is something often mentioned here on SS which I've never understood. Now I need to understand it if I'm to advise him what he can do legally.

Paspaley v Chief Commissioner of State Revenue [2014] NSWCATAD 217
http://www.caselaw.nsw.gov.au/action/PJUDG?jgmtid=176078

This case is about land tax in NSW - not very relevant to this topic.

The criteria for land tax and income tax are very different. Someone may still be able to count a property as their main residence for income tax purposes but not for land tax purposes, for example.

For income tax purpose you can still claim interest on a loan associated with your main residence, even without nominatiing at as the main residence, just by being absent and renting the property out. Nomination is only done at tax time after the sale.