Renting ourselves and move out of PPOR

[Deb]

Hi, I'm a newbie, I have been amazed at the wealth of information this site is providing, and would appreciate some advice.

My partner and I bought a property 3 years ago, for which we provided a large deposit, and lived in it for a year before using the equity in it to buy another property which we moved into, renting out the first property. We have found ourselves in the position of now having a huge mortgage on our PPOR and struggling to meet repayments. So we have made the mistake of owing more on our PPOR than our IP. We are now thinking of renting a house ourselves and turning our current PPOR into an IP. Does this make sense?

 

[Ausprop]

yes, provided you have a high income to write your expenses against

 

[The Y-man]

...using the equity in it to buy another property which we moved into, renting out the first property.....

Welcoem Deb.

How did you use the equity?

Cheers,

The Y-man

 

[silvia]

if you are struggling to make repayments then does that means you have tight cashflow?

assuming that's true then turning your PPOR into IP and rent will only make sense if end of month the rental income - expenses (interest + outgoing rent) is within your cashflow. otherwise wouldn't you still struggle to pay for your living?

 

[skater]

It makes sense so long as the place you rent is cheaper than the rent you will receive on your PPOR.

By renting your PPOR the loan on this and any subsequent expenses will be deductable too. But don't blow the savings you make. You will want to move back into the property before 6 years. This way it will still be classified as a PPOR for CGT calculations should you sell at any time.

 

[Deb]

Hi Y-man, not sure I understand question - we used 80% equity in old house to secure loan for new house. We made the mistake of not doing our homework before we committed ...

Yes, Sylvia, very tight cashflow, but we have the opportunity to rent very cheaply, so much so that we think we would be better off. Can we claim tax deductions on second house if we move out of it and it becomes second IP?

 

[investor888]

before using the equity in it to buy another property which we moved into, renting out the first property.

If you used the equity in the 1st house to purchase your new PPOR, then the interest on that portion of the loan is not tax-deductible, as the money was used for private use (not investment). ATO may eventually discover this if you have been deducting the interest.
If you turn you 2nd house into an IP, then that will be OK. But the question is, can you rent for cheaper than the rent you will be getting in. If not, then like stated above, it may make little difference to your situation.

If you do move out, get the property valued, as the property will be subject to CGT as an IP (and you don't want it calculated on the purchase price necessarilly).

 

[marg4000]

If you have the opportunity for cheap rent then I would definitely take advantage of it.

But it sounds as if you have been claiming some of the interest on the equity loan to buy your PPOR against your IP, which is a big no-no. If so, I suggest you contact the ATO to put things right before they detect the error.

I suggest immediate accountancy advice to ensure everything is in order.
Marg

 

[silvia]

Yes, Sylvia, very tight cashflow, but we have the opportunity to rent very cheaply, so much so that we think we would be better off. Can we claim tax deductions on second house if we move out of it and it becomes second IP?

forgetting the period when you use 80% of 1st IP to buy PPOR.

if you turn PPOR to IP then yes you can claim tax deduction.

the thing is even if you claim tax deductions (ignoring tax bracket i.e. whether it's worth it or not), you only get the deduction back once a year. that won't help with immediate monthly cashflow.

so forget about cash deduction, work out if you can foot the bill every month to see whether you can afford holding on to 2 IP's (after you turn PPOR into IP #2).

 

[wylie]

the thing is even if you claim tax deductions (ignoring tax bracket i.e. whether it's worth it or not), you only get the deduction back once a year. that won't help with immediate monthly cashflow.

We have never done it, but the deductions can be claimed back by lodging a variation with ATO. We prefer to get a tax cheque at the end of the tax year, but plenty of people prefer to get it every week via the variation.

Also something we have never done, but if you move our of your PPOR and make it an IP and rent cheaper elsewhere, as mentioned above, you can do that for up to six years and still not have to pay capital gains tax on the PPOR, as long as you move back into it.

Someone else will clarify this, or correct it if I have got things a bit wrong, but this is as I understand it.

I also agree that if you have claimed interest that is now allowed, you should get that corrected. You don't want the ATO to find out and fine you.

 

[Deb]

Thank you all so much for your replies - you have made things very clear and I will certainly be getting our accountant to look into this for us.