Newbie needing advice on IP#3

Well, I have finally worked up the courage to join this forum – no longer living through my husband’s posts… I hope he likes my username:)

I’ve just been talking to someone who has given me some fantastic advice, but I’m a bit confused about some aspects of it. Here are the details

Our situation
2 investment properties, very close to being positively geared

Our plan (all financials have been approved)
Move out of our PPOR making it IP#3.
Buy a PPOR house closer to family and friends (rent it out until the end of financial yr)

Owing: $350k (have also borrowed, and spent $50k against it)
Worth: $470k (conservative estimate)
Rental estimate is $470/week
After factoring in body corp fees and land tax this would nearly be positively geared.

We would like to keep this property because it is in a very nice suburb and we might want to move back at some stage…..

The advice I got was to get rid of the emotional attachment to my current PPOR (fair enough). Sell it, and with the money earned buy two properties off the plan and flip them (I hope that’s the right terminology)! This sounds great to me, even after my husband filled me in with all the risks involved with ‘flipping’.

The reason why I’m confused: Apparently if we make our PPOR into an investment we would have to pay capital gains tax (I can't remember on what - maybe any profit we make on rent)? Our accountant has also said to us once before NEVER make a PPOR into an investment - for tax reasons. I have never understood this.

I was also told that we wouldn’t be able to depreciate much of our PPOR because its 4 years old (townhouse)

After reading my post I guess I understand the whole depreciation thing… we would be able to depreciate a lot more if we bought a house off the plan but then again it wouldn’t be positively geared.

It would be great to receive some responses around the tax question but I would also be interested to hear about what you would do in this situation … and just to make it even more tricky, pretend baby #1 is 12 plus months away..... ;)

Let me know if I need to provide any further details.
Owing: $350k (have also borrowed, and spent $50k against it)

K - CGT. If you make your PPOR into an IP, you'll need to get an offical valuer come and give you a piece of paper. If you sell it, any captial gain you get from the point it becomes an IP will be taxed. With an offical piece of paper, you have evidence of its value at the point it changed from PPOR to IP. Otherwise, you and the ATO will have to guess its value and you might end up paying more CGT.
OTOH, if you never sell it, there is no CGT issue.

Depreciation - you can depreciate the building and its contents from the point it becomes a PPOR. For a four year old house, there's a lot of stuff you can depreciate. Get a professional in and they can provide you with a Depreciation Schedule you can take to the accountant. Bad news - if you ever decide to sell that house, all the money you have depreciated will be clawed back by the ATO as part of the CGT.

Key message - figure out now what the plan is for the house - sell or don't sell. Act accordingly.

Owing - Of the money you owe on the house, I am making an assumption that it is for the mortgage of that place. But you do mentioned an extra $50K. Possibly teaching grandma to suck eggs here, if so sorry. you know right that if you have spent that 50K on non-investment related things you won't be able to claim a tax deduction for it?

Flipping - This is always an option (addmittly, not one I choose). Suggest you might want to do some more research on this before you leap. This can be complicated to set up for only a one off, I believe most people use it as an ongoing strategy.

Thanks for your response. Yeah, the 50k borrowed against the house was used for deposits and purchasing costs on IPs #1 and #2.

Your comment on depreciation: so if I was to depreciate $100/week on the IP #3 - former PPOR - and after one year depreciated about $5,200 and decided to sell would I then have to repay that $5,200 to the tax man (and is this only because it used to be a PPOR)?
Thanks for your response. Yeah, the 50k borrowed against the house was used for deposits and purchasing costs on IPs #1 and #2.

Cool - that makes it easy :)

Your comment on depreciation: so if I was to depreciate $100/week on the IP #3 - former PPOR - and after one year depreciated about $5,200 and decided to sell would I then have to repay that $5,200 to the tax man (and is this only because it used to be a PPOR)?

Sort of yes and sort of no.

There are two concepts mashed up together I think. The first is that whilst your property is a PPOR you pay no CGT. You will pay from the point that it becomes an IP.

The second is the intersection between CGT and depreciation. If you depreciate anything and then sell it, it it calculated into the cost base of the property.

As a simple example, you have a property that is valued at $200K when it becomes an IP. You get depreciation of $10K in the first year. Also in that first year, the property saw a 10% growth, so the property is now worth $220.

You decide to sell the property.

The cost base of the property is $200K. The current value of the property is $220, therefore there is a captial gain of $20K. Which you have to pay tax on.

Except there was that depreciation you took. You said that the value of the builing and contents had gone down by $10K in that year. Fair enough says the tax office, but that means the cost base of the property is now $190K cause you said it was worth $10K less. The current value remains at $220K, therefore the captail gain is $30K. Which you have to pay tax on.

So, the PPOR status of the property doesn't count towards the cost base of the property, but how much you have depreciated does.

(In reality, the cost base calculation is a little more complex, cause other things are included. Check out the ATO's site for more info - (they refer to depreciation as a capital works deduction))

Hope that made things clearer


In buying your new home, will you be taking out a completely new loan (i.e. NOT drawing down on any equity you have now)

If that is the case, not much drama. Many people come unstauck because they have repaid their PPOR loan, and need to draw the money out to buy their new home. The loan against their old PPOR becomes non tax deductible as it was used for personal purposes (i.e. buyong new home)


The Y-man
So if pretzel simply turned her current PPOR into an IP and treated it like an IP such as claiming depreciation on building, fixtures/fittings, interest payments and other costs (PM fees, BC, rates, land-tax, etc) and didn't sell it.....then there would be no CGT issue to worry about....right?

What if she moved back into it after 5 or so years? Is there anything that needs to be considered then?

that would depend where pretzel goes to live during thaose 5 years I think...

you can only claim one place as a ppor at a time... if renting with your partner I guess it would work...but you dont think you could live in "your wife's PPOR " and still claim that as one "your PPOR"
I must admit, I feel very weird referring to my wife as "pretzel".....what kind of a name is that anyway! ;)

I think I asked the question wrong.

When we spoke with our accountant last year, she mentioned that you "NEVER" turn your PPOR into an IP because of [.......] - the dots in brackets is the blank part of the conversation that neither of us remember! We weren't really into property investment at the time and a lot of what she said went over our heads.

Now, we find ourselves in a situation where it's very likely that we will be turning our PPOR into an IP....why didn't we just pay attention to the accountant at the time.....

I can't think of any issues with turning our PPOR into an IP. We simply move into our new PPOR and rent out our current PPOR (which becomes an IP) and treat it like any other IP - claiming all the usual stuff....and if we don't sell it, there's no CGT implications. Is this right? Or is their some quirky rule in the ACT that I'm missing here?
Thanks all for your help. There are definetly still a lot of things that I need to learn but I am looking forward to it!

I think the best thing to do is keep my current PPOR, turn it into IP#3 and make it one of the ones we pay will provide us with a nice little income and we won't need to get through a period of negative gearing.


Pretzel :)
Hi Pretzl - that is a funny name but I like it!

You really should ask your accountant again but there is such a thing as the 6 year CGT rule.

You can leave your PPOR and rent it out for 6 years and not have to claim Capital Gains Tax - UNLESS you don't return by the end of that 6 years.

I like your idea to turn it into an IP. Are you renting or buying elsewhere?

Personally, to me the "flipping" idea sounds "flippent."

You will lose money on Real Estate agents, Stamp Duty and taxes not to mention the possible stress.

Pretzl, you need an Offset account against your PPOR and if your plan is to acquire more IP's then DON'T pay it off. This will cause complications down the track. AN Offset account will lower your interest payments but not the deductability if it is an IP and you decide to buy again.

Remember: Don't mix your personal expenses with your investment expenses.

I can't stress this enough. :)

Regards JO
Thanks Jo, I had heard about the six year rule but I do need to investigate it further.

I am buying elsewhere. I intend to treat the new house as an investment for the first 3-6 months so that I can claim back the stamp duty.

The new loan is being set up interest free with 100 per cent offset. We are paying principle plus interest on our current PPOR but its due for a refinance in January. It's going to become interest only (as by then it will be IP#3). Any additional money will go into the new PPOR.

After IP#3 there will need to be some serious savings in our household, I guess I can cut down on the grocery bill seeing that I'll be closer to family - I better let my mum know that I like to have dinner by 6pm ;)
Ha Good on you pretzyl,

Glad to hear you have the Offset going.

My best friend lives in the same street as her Italian Mother-In'Law. She has it made! All the love and support she needs, not to mention babysitting AND good ole Mamma cooking!

Regards JO
Sounds like your accountant doesn't like any complications in the paperwork.

People turn PPOR into IP all the time. You just need to get a few things done at the time to snapshot all the numbers (e.g. valuation, depreciation, loans, etc..).

Paperwork can always be sorted out. Agents fees and stamp duty pay for a lot of accounting.