Converting PP to IP

[Riviera]

I have recently moved intersate, should I convert my private home to a IP?? Whats the pro's and con's?

I want to buy a new home as I'm currently renting, but I may have trouble getting enough equity in todays market without having to buy insurance! I also have a inner city unit which has also slip back in valuation, so there is no equity there either.

 

[alexlee]

I have recently moved intersate, should I convert my private home to a IP?? Whats the pro's and con's?

I want to buy a new home as I'm currently renting, but I may have trouble getting enough equity in todays market without having to buy insurance! I also have a inner city unit which has also slip back in valuation, so there is no equity there either.

If you buy a new home and move into that, your old PPOR loses its CGT exempt status anyway. If you keep renting, your old PPOR remains CGT free for 6 years even if you rent it out and claim all expenses (interest, etc).

One option would be to sell your old PPOR to get enough cash to put down a 20%+ deposit to avoid LMI, but remember if you do that you give up all future capital gains associated with your old PPOR. Say your current PPOR is worth $300k. In 20 years it might be worth $1.2m. So you're giving up $900k in gains by selling. Compare that to paying a few k of LMI and keeping both. You'd keep that $900k gain as well as gaining the capital gains on your new PPOR.

Not advice by any means, but just remember by selling you give up the future CG on that property. The key to buy and hold property investment is having as much property as you can. Of course, if your cashflow doesn't allow keeping all the properties, you should sell (since if you can't keep up the payments you lose the properties).
Alex

 

[alexlee]

So, to sum up re converting PPOR into IP:

Pro
You get rent
You get to claim expenses, depreciation, etc
Keep CGT exemption (assuming you don't buy a new PPOR)

Cons
Not much, except you have to move all your furniture out, you can't really move back into the place until the lease is up, etc.
Lose CGT exemption (if you buy a new PPOR elsewhere)

Alex

 

[Riviera]

Thanks Alex

What if i rent for 12 months while building, do i get to keep the CGain on my PP, if i rent and then sell it when my new PP is completed.
Tony

 

[hobo-jo]

If you buy a new home and move into that, your old PPOR loses its CGT exempt status anyway. If you keep renting, your old PPOR remains CGT free for 6 years even if you rent it out and claim all expenses (interest, etc).

Have read a bit about trusts on the forums, what if you were to use a trust to buy the next property and you rented it to yourself...

Would that be an option to avoid paying CGT on a property?

 

[alexlee]

Have read a bit about trusts on the forums, what if you were to use a trust to buy the next property and you rented it to yourself...

Would that be an option to avoid paying CGT on a property?

Wouldn't try it, especially if you're using a hybrid trust (which you would need to if you were negatively gearing it and claiming the interest deductions yourself). I took the Tax Ruling reference from Julia, but here is the full doc:

http://law.ato.gov.au/atolaw/view.htm?locid='TXR/TR200218/NAT/ATO'&PiT=99991231235958

Basically says that using a hybrid trust to buy a residential property and renting it to yourself (where you are also a director of the trustee company) is a no-no. Idea being that the interest expense is considered to be of a private / domestic nature.

What's the difference between this and renting off some other landlord who makes a loss, given that market rent will generally result in a loss? To me, nothing. But the ATO has said otherwise.
Alex

 

[Noelc]

[QUOTE If you buy a new home and move into that, your old PPOR loses its CGT exempt status anyway. If you keep renting, your old PPOR remains CGT free for 6 years even if you rent it out and claim all expenses (interest, etc) quote]

Raises an interesting question what if you purchase a new PPOR and move but your old PPOR is still up for sale???

 

[Simon]

[QUOTE If you buy a new home and move into that, your old PPOR loses its CGT exempt status anyway. If you keep renting, your old PPOR remains CGT free for 6 years even if you rent it out and claim all expenses (interest, etc) quote]

Raises an interesting question what if you purchase a new PPOR and move but your old PPOR is still up for sale???

The legislation allows for 6 months overlap between the old and the new when selling.

 

[Riviera]

Noelc, your interesting question is where I'm at! I have moved, wondering to build or to buy a new PPOR, and at the same wondering to sell or rent my old PPOR.

The sell option would mean taking a hair cut in the current market or the rent option would mean taking out LMI on the new PPOR.

The only other option is to look at selling a Melbourne inner city unit which is now worth the same as I paid for it 6 years ago, not a good investment so far!

 

[Riviera]

I have gone with the PRO's , L J Hooker just found a tentant for my PPRO, 2 year contract, $500 per week.

I may buy my 3rd IP and keep renting for now, any idea where Melbourne is in the cycle. It would be nice to 6 IP's or 2.5m exposed at the start of the market up swing.

Tony

 

[Rystar]

hi Riviera

i dont mean to be a sticky beak... but can you give me a few of the details of the house? it must be pretty nice to be getting $500 a week

cheers
Ryan