Converting PPOR to IP

[Zipper]

I'm just about to settle my first home. Exciting times for our family. I purchased a place in Townsville to take advantage of HPAS and DHOAS (Defence member). I'm due to get posted in 12 to 18 months and am going to live in a DHA place in my new location, as its cheap rent. I'm planning on making minimum P&I payments and have my spare cash 100% offset to save on interest while in TSV. When we move, I'm going to take the cash out of offset and look at buying another IP.

I read that even if I rent my PPOR out after 12 months and I don't buy another PPOR that for CGT purposes it remains for six years. Is this the case?

With expected rental returns from my TSV place, it will be close to neutrally geared, is it worthwhile changing to IO and get positive cash flow? And making my new IP negatively geared? And have a neutral pair? Then I can avoid CGT down the track when I sell the original place and use the proceeds to buy more?

 

[Rolf Latham]

With expected rental returns from my TSV place, it will be close to neutrally geared, is it worthwhile changing to IO and get positive cash flow?

I gather the DHOS product is only available as PI.

While this is probably not a major issue, remember that if you have lotsa cash in the offset that the principal reduces far more quickly than you may like.


Ta

rolf

 

[Terry_w]

Zipper, did you mean you are going to live in the house initially? If so it could be CGT during your absence. If you don't live in it first it will be subject to CGT.

Changing the loan to interest only is a good idea. But this won't change it from positive geared to negative geared as the interest rate will remain the same. You may end up paying slightly higher interest with IO as the balance won't be deceasing. It will result in increased cashflow however.

 

[Zipper]

Thanks for the replies guys,

I'll be living in it for the first 12 months to qualify for the benefits and I'm not due to post until after then anyways.

Terry, that was a mistake in terminology by me, I meant to say by making it IO I would increase my cash flow due to lower payments. This would free up more cash to purchase another property.

I'm happy to pay down a fair bit in that first 12 months, as the place is more expensive than I really wanted to pay for a future IP.

Not sure about DHOAS an IO, I'll have to look into that, thanks for the heads up.

 

[rowena]

Put all your extra spare money into the offset account and not the loan. This means the loan is offset while your living in it, and then when you move you can either move this money into another account (aka high interest) or use it to buy another property... and you will still have your original loan amount .. or close to it with the repayments... If you put money into the loan itself then take it out and it is for personal use then it becomes contaminated money and a nightmare for your tax agent to deal with for claiming back through tax, aka you wont be able to claim the full interest of the loan on tax.

As long as you do not buy another PPOR within 6 yrs, then you wont pay CGT if you do sell, otherwise you will have to move back into the property before your 6 yrs is up. But this is if u do want to sell in the future or end up making this place your PPOR when you retire etc.

Also when you move out make sure you get a depreciation report done too on the house, as you will be able to claim that against your tax aswell.

 

[Zipper]

Hey Rowena,

Thanks for that. You and I are reading off the same sheet of music!! The plan is to pay the minimum payments for P&I and put the rest in an offset account. Then once we move into a rental, cancel the offset and use that cash as a deposit for another IP and stay in a rental until I get sick of the Army! That gives us the six year window to look at selling for CG without paying CGT, or if it's making good CF then just keeping it. I'm not looking to get a PPOR until I leave Army, so hoping to build up a CF +ve portfolio by then.

Will it cause many dramas if I have paid down some of the mortgage before I make it an IP? I don't plan on redrawing anything back that I have paid off the loan.

I'm going to look into IO with a DHOAS loan, but I figure that if I'm living in it and we are offset buy so much, I might as well get the loan down a bit and hopefully the place will be close to CF neutral when we leave. Then the second IP can be CF -ve.

 

[Zipper]

Can't do IO with a DHOAS loan. Looks like I'll have to re-finance and cut it away, or just keep paying P&I and keep the $350 a month they give me. Will reduce the tax offsets, but I guess if I pay it down and make it positively geared, then I'll have CF plus equity.

Think I'll have to chat to a broker down the track and work out the best options.

 

[start-up]

Keep us in the loop I'm in almost the exact same position.

 

[rowena]

Hey zipper,

Before you refinance etc...

as you have 12 months still left to reside there and you are ahead in payments, can you stop your repayments until you have used up all of your extra money you have paid on the property??? Otherwise can you withdraw the cash, because this is still your PPOR at the moment, but make sure that the cash you withdraw is used on something such as council rates and not personal, so its used against your property as a property expense if you are asked. Id personally be stopping the extra repayments and check with the bank if you can stop payments all together as you are in advance.

Rowena

 

[Terry_w]

Hey zipper,

Before you refinance etc...

as you have 12 months still left to reside there and you are ahead in payments, can you stop your repayments until you have used up all of your extra money you have paid on the property??? Otherwise can you withdraw the cash, because this is still your PPOR at the moment, but make sure that the cash you withdraw is used on something such as council rates and not personal, so its used against your property as a property expense if you are asked. Id personally be stopping the extra repayments and check with the bank if you can stop payments all together as you are in advance.

Rowena

Potentially dangerous considering the recent tax ruling on applying part IVA to schemes like this. Good in theory, but seek some advice before doing.