Loan structure advice?

[Ellmay]

Hi,

I have a couple of questions if someone could please help

1) I'm currently applying for finance for a unit I put an offer on on the Gold Coast (Tugun beachfront). This is my third IP.
Although I've been through the buying process twice already I'm still a little unsure of how to set this up. My other two loans are variable. I really want to fix the interest rates for this property as its going to be a pretty large loan and it makes me a little nervous at the thought of interest rates going up even a tiny bit. I don't really intend on drawing equity out in the future for anything. I think I've maxed out my ability to comfortably service any more loans for quite a while now. Ideally I would love to fix the loan and have an offset that i could add savings to but my mortgage broker tells me I cant do this. Then theres the option of splitting the loan variable/fixed but that still seems daunting to me. Are there any other options?

2) I also wanted to go for the cheaper option for stamp duty (ie. live in it for a while so i can claim the PPOR stamp duty rate instead of the IP rate which is double). This would kind of suit me because I wanted to renovate it and live in it for a while anyway before renting it out. But I guess theres implications with this such as not being able to claim the renovations on tax because at that point in time its not a IP. I'm sure theres um "ways" around this but not too sure. I can justify the renovating and living in it period because of the $7,000 savings i would have from the PPOR rate of stamp duty. Is there something im missing? Does this screw up the loan structure if it goes from a PPOR to an IP?

3) What about capital gains tax? How does this work - PPOR versus IP and selling time frames?

Sorry that was a bit long. Would really appreciate some feedback

Thank you

 

[Jamie M]

Hiya

1. If you've got a PPOR loan best to link up the offset to that. You can get fixed loans with an offset but you usually pay a higher rate for this feature. If you don't have a PPOR - you've still got the other variable loans you can offset.

2. OK - so now I've realised you don't have a PPOR You can turn a PPOR into an IP that's not an issue. In terms of claiming those reno costs - you'll need to seek a decent accountants advice on what's possible.

3. Same deal as above - get a good accountant to work out costs/options. Some good ones on here.

Cheers

Jamie

 

[Terry_w]

You generally won't be able to claim renovations even if it was rented. Renovations are generally capital works which are depreciated.

If you live in the property initially you could potentially claim it as the main residence for up to 6 years after you have moved out and it could be exempt from CGT during this period.

 

[Ellmay]

Thank you for the replies

Jamie M - Why is it best to link an offset to a PPOR loan?
Also - how do the banks know if the property is going to be a PPOR or an IP? I guess the mortgage broker tells them when applying but what if you apply for an IP loan (so they lend you more) and then afterward decide your going to use it as a PPOR?

I spoke with the tax office and asked about CGT. It doesn't matter how long you live in the house - could even be a week (as long as its straight after purchasing) - and then you rent it out, you will be exempt from CGT (for up to 6 years). So basically change all your mail to the address, get electricity/utilities hooked up under your name, "move in" and then move back out after however long and change your address etc all over again. So why don't more people do this when they buy a house? Seems a bit too easy to avoid CGT. And I guess by doing this you get the PPOR rate of stamp duty too? There must be some down sides to setting it up as a PPOR and then changing to IP straight away? Surely I'm missing something.

 

[Peter_Tersteeg]

Thank you for the replies

Jamie M - Why is it best to link an offset to a PPOR loan?
Also - how do the banks know if the property is going to be a PPOR or an IP? I guess the mortgage broker tells them when applying but what if you apply for an IP loan (so they lend you more) and then afterward decide your going to use it as a PPOR?

The reason you link an offset account to a PPOR and not an IP loan is because the offset account will reduce the interest you pay. The PPOR loan is not tax deductible whereas the IP loan is tax deductible. If you've got a PPOR loan and an IP loan, due to the tax deductions you're financially ahead if you reduce the interest on the PPOR loan.

The banks know because that's how we structure the loan application.

The banks won't lend you more for an IP. In terms of LVR they actually lend slightly more for a PPOR because their experience is that people will default on an investment property before they'll default on their own home.

If you're thinking they'll lend more because you'll get rent for the property, this is also incorrect. They then need to factor in the cost of your accommodation (because you're not going to live in the house). Lender math usually has a result that your affordability is better if you buy a PPOR. Regardless of this, if your affordability is so tight that this is going to make a difference, you're probably over extending yourself and should buy a cheaper property anyway.

In many states there's also a (very slight) reduction in stamp duty for a PPOR.

I spoke with the tax office and asked about CGT. It doesn't matter how long you live in the house - could even be a week (as long as its straight after purchasing) - and then you rent it out, you will be exempt from CGT (for up to 6 years). So basically change all your mail to the address, get electricity/utilities hooked up under your name, "move in" and then move back out after however long and change your address etc all over again. So why don't more people do this when they buy a house? Seems a bit too easy to avoid CGT. And I guess by doing this you get the PPOR rate of stamp duty too? There must be some down sides to setting it up as a PPOR and then changing to IP straight away? Surely I'm missing something.

Just keep in mind that you can only claim one PPOR at any given point. If you do what you suggest and then live in another house that you own, you'll only get the CGT exemption on the property you're living in.

 

[ChrisA1]

So why don't more people do this when they buy a house? Seems a bit too easy to avoid CGT. And I guess by doing this you get the PPOR rate of stamp duty too? There must be some down sides to setting it up as a PPOR and then changing to IP straight away? Surely I'm missing something.

You can only claim one residence as your PPOR at once so if you moved into the place to make it your PPOR, then wanted to sell it under the 6 year rule, you need to rent for the period that you hold this property as a rental. Most people want to live in their PPOR and use the equity for future purchases.

I'm sure the ATO would jump on you pretty fast if they saw trends in claiming items for a rental property, then no CGT paid on the sale (but I'm sure others much wider than me would be able to inform here).

 

[Terry_w]

I spoke with the tax office and asked about CGT. It doesn't matter how long you live in the house - could even be a week (as long as its straight after purchasing) - and then you rent it out, you will be exempt from CGT (for up to 6 years). So basically change all your mail to the address, get electricity/utilities hooked up under your name, "move in" and then move back out after however long and change your address etc all over again. So why don't more people do this when they buy a house? Seems a bit too easy to avoid CGT. And I guess by doing this you get the PPOR rate of stamp duty too? There must be some down sides to setting it up as a PPOR and then changing to IP straight away? Surely I'm missing something.

Yes, you are missing the correct interpretation of the law. it is true that the legislation does not list a minimum period that you must live in the property. However you must make it the main residence to get this exemption.

'moving in' won't cut it. You must physically live there. I would suggest a week is not long enough, even if you did move all your stuff there and change the addresses on everything. This seems like a temporary arrangement.

 

[Terry_w]

And I guess by doing this you get the PPOR rate of stamp duty too?

It would be better not to guess this. Stamp duty is not administered by the ATO so what they said would not apply. You should look into the relevant state revenue authority and stamp duty legislation.

 

[Ellmay]

I don't have a PPOR and won't be getting one in the next 6 years (besides the one I will live in for a while soon).

Stamp duty in QLD is double for an IP so it will make a big difference to purchase costs. I just don't understand how they determine how long is long enough to stay in it for CGT exemption. It's so very vague. Are you supposed to inform anyone once you have moved out?

ChrisA1 - what do you mean by the ATO will jump on me if I'm claiming items for a rental property then no CGT paid on the sale? It's quite common for people to turn their PPOR into an IP isn't it? This is a common way of CGT exemption that's also listed on their website.

 

[Terry_w]

It's so very vague. Are you supposed to inform anyone once you have moved out?

No need to notify anyone (from the tax point of view anyway).

The main residence issue is a question of fact. There is no definition of the term 'main residence' in the tax act so the words take their ordinary meanings. Main would mean principle. Residence would be some form of dwelling. There is not much case law on this topic.

One case is ERDELYI & ANOR v FC of T, Administrative Appeals Tribunal of Australia, 31 May 2007
In this case the owners only placed some bedroom furniture in the house, ie. didn't fully furnish it. They also cooked with a portable gas cooker. Their electricity usage was also low.
That the home was their main residence was rejected.

The burden is on you the tax payer to prove it is your main residence.