GetRich, whether you buy your first property as a PPR or an IP is asked here often and firm reasons are given for why it should be an IP.
However, until one uses the discipline to sit down and nut out the calculations on a spreadsheet, you won't see the pros and cons clearly.
Herewith is a spreadsheet laying out the two scenarios to the best of my knowledge. Feel free to plug your individual circumstances into it and see whether buying as an IP gives an advantage.
Before you do so though, consider these factors which are to the best of my knowledge (and I stand to be corrected by others):
Stamp Duty
stamp duty is higher on IPs and though each state offers FHBs a stamp duty concession, I don't think it applies to your first property if it is an IP.
FHOG
There has been differing opinions on the forum as to whether a first property bought as an IP is allowed the $7000 FHOG. The grant is managed by each state independently AFAIK, and you want to check your particular state's rules.
Rent Paid to Live Elsewhere
A big advantage of buying first property as IP is to minimize rent living somewhere else. If you can live with parents or share with friends elsewhere cheaper, factor that into the spreadsheet.
Purchase Costs
AFAIK, if you buy the property as a PPR, and after one year convert it to an IP, you cannot use your purchase costs at all as deductions from your capital gain. But others might be better informed on this. Anyway, I have set the spreadsheet up accordingly.
So, with current data entry in the spreadsheet, you will see at the end of the year, buying the property as an IP is disadvantageous to the tune of $13,070.
I am happy for anyone to point out errors in my assumptions.
I have used tax rates for 2008 and stamp duty tables for Qld.
What I Suggest
When I have modelled this scenario in the past, it was most profitable to buy as a PPR and hold as such for 12 mths, then change status to IP.
Some believe 6mths is enough, but I believe either the FHOG or First Home Buyer Stamp Duty concession of some states is dependent on a full 12 mths as a PPR. I can't remember which it is. But maybe a mortgage broker or banker can advise.
And it is beneficial in the first year of ownership as a PPR that you rent out a room or two to friends, for cash of course
And finally, conversion to an IP only offers an advantage if you are able to wangle your after tax capital gains to be higher than your after tax holding cost. And for many, that means not selling until they stop working...