Convert investment property into your primary residence?

Hi there

I am new to the forum but have a quick question. I have been searching the web trying to find some guidance regarding purchasing a property as an investment with the intent to move into it 5-10 years later.

Are there any tax implications or things I need to consider when making this decision? The intent is to purchase a property in my dream suburb before they get too expensive!!

Thanks,

Kaisha
 
Kaisha,
I think there would be more potential issues if you were moving OUT of your PPOR and making it an IP. The scenario you describe is fairly straightfoward, without knowing more of your personal circumstances.

Treat this simply as an IP. Maximise the rent, go IO on the loan and make sure you have a depreciation schedule so you can claim depreciation on your tax.

If your intent was to pay P&I, stick to IO, but put the equivalent of the principle repayment in an offset account... just in case! Unless you are already in a PPOR on which you owe, in which case put the money into an offset against the loan for that property.

Then when you move into this place, make sure that you get a valuation done for CGT purposes, because if you ever DO sell it later, you would expect to pay CGT on the gain while it was an IP. I think that's the only issue to be aware of.
 
Hi,

Just clarifying Rob's comments - you won't need a valuation when you move in (that's only if you had a PPOR and then moved out and started renting it).

If ever you sell the property, then the CGT will simply be calculated on a time basis.

Zargor

DISCLAIMER

Double check what I say and don't take it as gospel.
 
Zargor you are correct in that you don't NEED a valuation but it can be financially to your benefit.

If you DON"T get the valuation you will pay a %. Eg if you rent it out for 5yrs and sell it after 20 years you will pay 25% of the capital gain.

So you are at an advantage if say after 5 years the property did not go up much and you got the valuation. Because you pay capital gains on the amount it went up in that time. That is why sometimes people want a low valuation instead of a high one.

kaisha make sure you do your sums. Renting an expensive property can be, well, expensive. You might be better off buying 2 cheaper properties as the holding costs are cheaper over 5-10 years because rent is higher and you should achieve the same gain, thereby allowing you to still buy into your preferred suburb. Although CG will be an issue.
Lots of things to consider. Good luck.
 
Hi Travelbug.

I understand the logic of what you say - certainly reduces the potential CGT if you have a low valuation at the point you make it your PPOR - only issue is, I don't think you have that luxury of choosing (i.e. you are stuck with calculating CGT on a time basis).

Perhaps there is an accountant in the room who can clarify this issue??

Zargor
 
I'm not an accountant, but no one has chipped in yet.

According to the ATO:

Dwelling used to produce income for more than six years and first used to produce income after 20 August 1996
.
.
15 September 1994, and immediately started using the apartment as [...] main residence [...] July 2008, [...] sold the apartment for $555,000 [...] treats the dwelling as having been acquired on 29 September 1996 at the market value at that time (my emphasis)
.
.
Capital proceeds - (Cost base + costs) = Total capital gain

$555,000 - ($340,000 + $15,000) = $200,000

then:

$200,000 x 2,193 divided by 4,384 days = $100,046

So the way my simple mind reads this is that the cost base is "at market value" from the date you start (or stop?) earning income on it, but there is still a time apportionment on the balance of the gain.

So one probably should try and get a high "market" valuation, so that the gain (and hence the tax) is less if it's ever sold.

Please can an accountant clarify this one - I won't sleep otherwise, as I think I've managed to confuse myself! :D
 
Hi Travelbug.

I understand the logic of what you say - certainly reduces the potential CGT if you have a low valuation at the point you make it your PPOR - only issue is, I don't think you have that luxury of choosing (i.e. you are stuck with calculating CGT on a time basis).

Perhaps there is an accountant in the room who can clarify this issue??

Zargor

I am not an accountant, but have recently read that the split is on a time basis, but also to keep all receipts for any work done.

I am in a similar position - IP owned since 2004, depreciation schedule in place, and I am about to spend probably 50-60% of the property's value on a renovation to make it into my PPOR for potentially the next 15 years.

I am currently getting surveys and engineering reports done while the tennants are in there, and probably will have the yard totally cleared of trees, but will seek advice on what (if any) of these expenses can be claimed against the rental income.

I will probably look further into getting pre and post renovation valuations done, but probably more to assess the equity and get me additional borrowing capacity than to really do much in terms of capital gains exemption 15 or 20 years down the track.

Any tips or putting me in the right direction certainly appreciated.

Cheers,

MK
 
selling my IP has been slow....thinking.. if I sell my PPOR and move into IP.Am I correct, that I would only pay CGT when the I sell my new PPOR / old IP. Name on title will not change.
 
given the scenario i would just sell up what u live in now and move to your "dream place" as ppor with no hassle freehold etc, then using it's equity to re-invest in something 95 % or perhaps 97% ? who knows world's money tap must be on full speed again soon u might be able to borrow 100%-110% of property values like that last boom :)
 
Thx. What happens to the money I will be spending to do Reno before I make the IP PPOR.
What happend to the money I will be spending while having as PPOR. CGT will I add all the expence
 
Just be sure to keep very good records both while the property is an IP AND while it is your PPOR.

Otherwise CGT calculations will be a nightmare. Even if you intend to live there all your life, the CGT obligations will pass to heirs.
Marg
 
Just to clarify I have this correct.
If I purchase a property for 600k and rent it for 5 years and then live in it (as PPOR) for 15 years, after the 20 years I sell it for 1.2m. I'd have a capital gain of 600k, of that 600k I pay capital gains tax on 25% of that 600k, so thats 150k I pay CGT on.

What would happen to capital expenses, say after 10 years (while its my PPOR) I spent 100k on renos, is any of this cost claimable against the capital gain or is it not claimable because it was my PPOR at the time?

If I was to be considering a purchase where I know I'm going to move into it after 4/5 years is there a better ownership structure than buying in my own name.
 
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