Perpetually Upgrading PPOR Strategy

Hi there,

I think the CGT-free status of the PPOR, along with the 6 year CGT-free rule, make the PPOR a great ''investment'' and a great store-house of people's wealth.

So what are your thoughts on this basic strategy:

Buy PPOR
Live in it for 6 months
Then move out
Rent out former PPOR, so loan is fully deductible
Rent a modest place to live in, OR, live in one of your existing investment properties where the loan (hence, non-deductible debt) is smaller/negligible and/or can be paid out very quickly
After 4-6 years (depending on where we are in the market cycle), sell the initial PPOR (your "nominated'' PPOR) CGT-free (no additional LOCs to be created against this property)

Then buy a new PPOR (bigger and better) using the sale proceeds from this property and another modest loan
Move into this property for 6 months
Then move out
Rent out for former PPOR, so loan is fully deductible (and potentially neutrally geared/CF +ve or low negative geared due to a lower LVR)
Move back into a modest rental property or the previous investment property with low or nil non-deductible debt
After 4-6 year (depending on where we are in the market cycle, sell 2nd nominated PPOR CGT-free again

Repeat the same process ad infinitum, each time buying a bigger and better PPOR.

When closer to retirement, sell the massive PPOR you now have CGT-free, to invest in income producing assets.

This strategy would require you to buy, sell and upgrade your nominated PPOR at regular 4-6 yearly intervals (and each time you would move into the PPOR and then move out again after 6 months), whilst maintaining a relatively more modest lifestyle in terms of where you actually lived, and require you to move houses twice every 4-6 years, so not for everyone...

But interested in your thoughts...

It wouldn't of course preclude you from buying other residential investment properties, CIPs, shares, businesses etc. at the same time.

Thanks.
 
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You would probably know a lot more about this than me Aaron as your in the business. But I thought that the average family upgrading usually meant the sale of the current PPOR to buy their next bigger PPOR, not holding onto the house for the next 4-6s years before selling.

But as I said this was a bit of a stab in the dark - and you would have more knowledge of this as you deal with people buying new properties every day.
 
We've done it twice in a row now. Once to get out of a bad area, once because the house was just too damn small. I can see us outgrowing this house within 3 years (the rooms are fairly small) so we plan to do it again then, and I don't see why I should pay CGT just because my kids collect more stuff than I have room to put it.

If you couldn't do that more than once, what would happen to all the people who just upgrade house every few years, because they need to? Its actually the reason the CGT exemption exists in the first place.
 
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We've done it twice in a row now. Once to get out of a bad area, once because the house was just too damn small. I can see us outgrowing this house within 3 years (the rooms are fairly small) so we plan to do it again then, and I don't see why I should pay CGT just because my kids collect more stuff than I have room to put it.

If you couldn't do that more than once, what would happen to all the people who just upgrade house every few years, because they need to? Its actually the reason the CGT exemption exists in the first place.


The difference is that you are probably actually living in the home, therefore it is really your PPOR.

The strategy outlined above means that the "PPOR" was never truly a PPOR, as it is only planned to live in each for 6 months.

I have no idea whether it is allowable or not, but constant moving would not fit in with many lifestyles.

BTW, check with state stamp duty "rules" if you are taking advantage of any concession, Queensland's used to require a 12 month residency in the property.
Marg
 
Hi Jit
I have tennants who have done wealth building by changing their PPOR.
They buy blocks of land and build new homes of a quality standard in quality areas.
They rented my ip for 12 months. My ip has a large shed so it was great for their storgage.
They have just moved into their latest build and are already hunting for the next block. They will live in their new place for 1 or 2 years depending on the market. Once its sold the building begins on their next new place.
They have created considerable wealth doing this whilst working for average wages. With each sale a certain portion of funds is allocated to purchasing quality Oz shares. This in time will generate their income when they choose to leave the work force.[ It already is doing this but they reinvest for now]
They never worry about going to the bank for construction loans as they are well and truly cashed up.
Its quite an easy way of wealth creating if you are flexible and willing to move. {they never move out of their chosen area]
They have been smart and up to date with current trends with their builds and never had tennants to cause them grief.
Its well worth considering.
cheers
 
It sounds like a very tiring strategy to me!

I think PPOR's can be a great tool for wealth creation. But I think its better to buy, live in and add value and then sell and move on with the equity you've built up, rather than a "tricky" approach of mixing the usage of PPOR/ IP. I think in the end with your approach you'd either get caught out by the tax man, or killed by your family!
 
This talks a lot about tax deductions and capital gains but where's the income in all of this? And what about the transaction costs - even if there is no CGT there is still stamp duty and agents fees to pay every 4-6 years?

Until you retire you are just buying "assets" that give you a low yield, that probably keeps getting lower every time you "upgrade". How does that compare with buying real (income producing) assets that yield well from the get go and continue to do so? You have to compare this strategy with one that gives you lots of income in the intervening years, the same chance of capital gains and where you don't have to keep paying for buying and selling all the time! You can just keep leveraging to buy more assets that yield well instead. And likely retire earlier as a result...

Am I missing something?

BTW just on the CGT - if you live in your IP it becomes your PPOR!
 
We want to do the upgrade thing twice more doing exactly what we've just done (buy old house on double block, live in old house while building new house on other half of block, sell or rent old house), then stop as we should have the place paid off by then. But nothing fancy with keeping the previous house as an IP. Just a ploy to get a debt-free PPoR. Not everyone is in a position to be able to collect extra houses.
 
Ignore my earlier comment! I read it wrong. (note to self, don't read or post when unwell) I met a lady/developer who did something like that with 6 kids. Along the line of yadreamin's post. She loved it! I wouldn't mind doing something along those lines. I detest renting though so i could only do it with established homes or have finances to stay in existing while building the new. My husband would totally oppose it, as he gets attached to trees/fruit trees/vege gardens. After moving a few times in the last year my son has asked if we can stay in the same house and stop moving around. So apart from financially you need to think if it would suit your lifestyle. I have a friend who has done a similar thing also. After immigrating to Australia she started off in one of the cheapest suburbs in Perth and is now in an expensive part of Perth. I haven't seen her latest build, but the one before that was really nice!!!
 
Hi there,

I think the CGT-free status of the PPOR, along with the 6 year CGT-free rule, make the PPOR a great ''investment'' and a great store-house of people's wealth.

So what are your thoughts on this basic strategy:

Buy PPOR
Live in it for 6 months
Then move out
Rent out former PPOR, so loan is fully deductible
Rent a modest place to live in, OR, live in one of your existing investment properties where the loan (hence, non-deductible debt) is smaller/negligible and/or can be paid out very quickly
After 4-6 years (depending on where we are in the market cycle), sell the initial PPOR (your "nominated'' PPOR) CGT-free (no additional LOCs to be created against this property)

As far as I'm aware the 6 year CGT exemption rule has very specific criteria. Acceptable reasons are:

- moving interstate or overseas
- living with a sick relative long term
- going on an extended holiday

Here is the ATO link:

http://www.ato.gov.au/corporate/content.aspx?doc=/content/86191.htm
 
As far as I'm aware the 6 year CGT exemption rule has very specific criteria. Acceptable reasons are:

- moving interstate or overseas
- living with a sick relative long term
- going on an extended holiday

Here is the ATO link:

http://www.ato.gov.au/corporate/content.aspx?doc=/content/86191.htm

Those are just examples of why you moved out and don't appear to be the only reasons allowable. Well that's how I read the preceding paragraph to the examples:

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.

Moving from your main residence could be for reasons such as: ...
 
A lot of people don't time their buying so it's possible that they don't have to worry about capital gains tax over a 6 year period, especially after taking into the additional transaction costs.

The main problem with this strategy is that property markets move in cycles and if you manage to achieve significant capital gains with your current purchase, then the next purchase in around the same area is unlikely to have the same kind of growth. So to optimise this strategy, you might need to consider relocating to another ring, state or country. Just moving is a hassle, let alone twice in 6 months, but to a completely different area would probably be a deal breaker for even the most ardent investor.
 
And what about the transaction costs - even if there is no CGT there is still stamp duty and agents fees to pay every 4-6 years

You're right, the stamp duty costs and selling fees may not make it worthwhile, depending on how much CG you have had.
 
A lot of people don't time their buying so it's possible that they don't have to worry about capital gains tax over a 6 year period, especially after taking into the additional transaction costs.

The main problem with this strategy is that property markets move in cycles and if you manage to achieve significant capital gains with your current purchase, then the next purchase in around the same area is unlikely to have the same kind of growth. So to optimise this strategy, you might need to consider relocating to another ring, state or country. Just moving is a hassle, let alone twice in 6 months, but to a completely different area would probably be a deal breaker for even the most ardent investor.

Well said Paul, I think you're right in that the nature of market cycles will make this strategy tricky at times.

And most of all, as a few others have also mentioned, is the practicality of moving so often and the impact it will have on families, especially those with kids, and your lifestyles.

Anyway, I think the principles here are still important, ie. these tax rules are a simple way of getting a tax-free asset with a fully deductible interest loan.

And you don't necessarily have to move out after only 6 months to take advantage of it, and you can always move back in before the end of the 6 year period to stay there (permanently or temporarily) to extend the 6 year period further again.

I know a few on the forum who have intentionally done this, would be good to hear from those who have...
 
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