Knock down PPOR and rebuild and rent it out..

[RE rocks]

All,

I would like to get your opinions on this. I am currently in the process of knocking down my PPOR.

Me and my wife are planning to rent whilst the construction and may be rent for a bit longer.

Lets say the PPOR is completed in Dec 11 and we rent it out.i.e convert PPOR into IP. WHat are some of the tax implications.

Can I claim the site costs and claim tax-deductions on the interst I pay during the time of construction.

We eventually want to move back into the new house may be in 2013.

Your help is appreciated.

cheers

 

[marg4000]

From what you say this is your PPOR you are knocking down, so construction interest won't be tax deductible.

If you then turn it into an IP costs become deductible from when it become available for rent once completed.
Marg

 

[RE rocks]

From what you say this is your PPOR you are knocking down, so construction interest won't be tax deductible.

If you then turn it into an IP costs become deductible from when it become available for rent once completed.
Marg

If I advertise it for rent prior to knocking it down, will that make it an IP and hence everything becomes deductible.

I can demonstrate with the real estate ads and my intention to rent. Coz its a run down house, i could convince them to A TO and say that it didnt attract tenants and i finally demolished it.

thoughts???

 

[RE rocks]

TO explain this better, lets take this scenario

PPOR bought in 2009 -

Rented out to family member in Feb 2011 ( monthly basis) for 2 months.
( PPOR to IP) Get valuations done, Convenacyor reports, rental appraisal, hand-wrriten reciepts ( Cash) In a nut shell prove it to be an IP

Knock down the house in Apr 2011

Construction commence in May 2011

New House ready by April 2012

Rented out the new home till April 2013

Can i claim site costs, interests during construction, demo costs etc

 

[Graingrower]

In that scenario interest should be claimable. Repairs to a house are claimable but not improvements (can these be depreciated?)

I wonder what ways there are to turn improvements into repairs.....
A very old house near us was built on land that is now zoned commercial. This meant that the owners could not demolish the house and build a new one. So what they did was to knock down the back half of the house and rebuild it. Then they knocked doen the front half and rebuilt it. Result: new house in the main street of town.

 

[BV]

Can I claim the site costs and claim tax-deductions on the interst I pay during the time of construction

No you can't
If it was that easy everyone would be doing it.
An investment property ceases to be an investment when you demolish it

 

[RE rocks]

No you can't
If it was that easy everyone would be doing it.
An investment property ceases to be an investment when you demolish it

But if the house was an investment prior to demolishing and after completion, does that not prove it to be an IP.

In a nut shell, if you were to knockdown an IP and rebuild and rent it again, it still remains an IP.

 

[bluestorm]

Can I claim the site costs and claim tax-deductions on the interst I pay during the time of construction.

The answere is NO. It's not an IP if there is no house. Maybe you should start with reading up the ATO definition of an IP.

You can't claim interest deductions on an IP when there is no house (it's not being rented out). Your site costs will add to your cost base (and are not deductible anyway). Your not doing repairs for a tenants, but capital works.

If what you want to do were legal, we would all be doing it. Buying some crappy property, pulling it down and rebuild, and having the tax office pay the interest (via deductions) and add so some of the building costs. Sweet. I'd find a really slow builder. Someone what take 10yrs to finish building. Then pay no tax on rental income, and get deductions for interest.

But if you manage to get this by the ATO without getting caught for tax evasion, and having to pay the money back with interest, then let us know.

 

[Deena]

Whilst you are rebuilding though you do not have a place to rent, the scenario is different I think if you buy a block, build on it always with the intention of it being a IP then it would be eligible for deductions from the beggining.

 

[buzzlightyear]

RE rocks, I had a property purchased in November 08. It was a rental. I advertised it with a REA. It effectively didn't have a kitchen, it was very basic (deceased estate). I decided to renovate in late January, early February 2009. I completed the reno and it was rented in November 08. My accountant said to me that the interest costs prior to renting out were not deductible as an expense but were depreciable only.

I also thought that the costs would be treated as an expense. I would double check your circumstances and your assumptions with an accountant.

 

[RE rocks]

RE rocks, I had a property purchased in November 08. It was a rental. I advertised it with a REA. It effectively didn't have a kitchen, it was very basic (deceased estate). I decided to renovate in late January, early February 2009. I completed the reno and it was rented in November 08. My accountant said to me that the interest costs prior to renting out were not deductible as an expense but were depreciable only.

I also thought that the costs would be treated as an expense. I would double check your circumstances and your assumptions with an accountant.

Hi

"RE rocks, I had a property purchased in November 08. It was a rental. I advertised it with a REA. It effectively didn't have a kitchen, it was very basic (deceased estate). I decided to renovate in late January, early February 2009. I completed the reno and it was rented in November 08."

Was it rented out prior to renovation. I totally get where you coming from. My question is if it was a rental property prior to renovation/demolition and your intention was to continue to make it a rental, are the interest amounts deductible...

not the building cost....

Also, I am only talking about demolition costs, site/soil survey etc.

Sorry if my question was vague.

Your take on this is appreciated

 

[bluestorm]

My question is if it was a rental property prior to renovation/demolition and your intention was to continue to make it a rental, are the interest amounts deductible...

Asking the question many times will not change the answer. NO, the interest amounts are not deductible, as the property is no longer an investment during the build, and not generating income. It is deductible if you rent out before, and after the construction, but not during.

 

[BV]

Asking the question many times will not change the answer. NO, the interest amounts are not deductible,.

What about if I ask it 10 times and use different words?

 

[BV]

My accountant said to me that the interest costs prior to renting out were not deductible as an expense but were depreciable only.

And this is right but if you were to knock it down it stops being an IP on demolision day

 

[Rob G.]

PPOR bought in 2009 -

Rented out to family member in Feb 2011 ( monthly basis) for 2 months.
( PPOR to IP) Get valuations done, Convenacyor reports, rental appraisal, hand-wrriten reciepts ( Cash) In a nut shell prove it to be an IP

Knock down the house in Apr 2011

Construction commence in May 2011

New House ready by April 2012

Rented out the new home till April 2013

Can i claim site costs, interests during construction, demo costs etc

Generally you can claim revenue type expenditure (e.g. interest, rates) whilst building and renovating your IP. Demolition and construction would mostly be capital.

However, it appears you have only briefly rented to a related party to try to cloak the property as an IP when really you want to make it your PPOR in the near future.

Should the ATO choose to audit you, they would likely either:

A) deny the property is an IP because of plans to make it a PPOR again;

B) the whole expense is designed to secure a capital gain, so s.51AAA ITAA36 should deny deductions; or

C) Part IVA would apply to make transactions void as against the Commissioner.

You should talk to a Taxation Accountant about the details of what you have done and plan to do before claiming any deductions. Taxation Law in practice looks at the substance of the transactions and not merely their face value.

Cheers,

Rob

 

[synthman]

Generally you can claim revenue type expenditure (e.g. interest, rates) whilst building and renovating your IP. Demolition and construction would mostly be capital.

Would Rob or anyone please advise that if one's intention is genuine i.e. I genuinely want to improve the value and future rental return of an existing IP property by knocking it down and rebuild, I would then be able to claim loan interest and rate payments as tax deduction? Would I then state rental return equals to $0 during the building period when I submit my tax return?

Where can one find more information on this topic?

I can see the logic behind the ATO giving incentive for investors to improve their assets for the purpose of increasing financial return in the future, but I also agree with comments others have made that on the demolition day, the property ceases to be an income producer and therefore tax deduction also stops. Which theory is correct?