Should a 1st Home Buyer buy as PPOR or IP?

[thefirstbruce]

I have been talking with a few 20 somethings about getting into property recently. They obviously feel despondent about being left behind after the boom.

I have been trying to help them find a way of getting a house of their own. My view was that it would be best to stay at home with parents and buy the house as an investment property. However, when I started looking into it a bit more carefully, I noted a few points:

- there aren't too many parents that could afford to let their kids stay home for free, so you would have to factor in oaying rent to the parents.

- in Qld, the state gov't scraps transfer (stamp) duty, and mortgage duty for 1st home buyers on houses under $250k. This in addition to the FHOG can add up to $14k. From what i have read so far, these concessions would not be available if the property was bought as an IP.

- there is the matter of whether the tax deductions of buying as an IP would offer an advantage over buying as a PPOR (and renting out the PPOR even partially) and avoiding CGT down the track (though I sense CG might be low for the next 10 years).


As I have pondered this issue many times, I thought it could only be resolved by comprehensively running the numbers on a spreadsheet.
www.tekserv.com.au/bruce/FirstHomeBuyer.xls

The result was that the choice that offers the best outcome is to buy the house as a PPOR, then at the beginning of year 2, to change it over to an IP. Of course, a valuation would be required to protect first year's capital gains from CGT. And this factor could be exploited by adding as much value as possible while the house is exempt from CGT.

I have used a few assumptions in the analysis:
- the house is 2 or more bedrooms.
- a granny flat exists or is built in first year.
- the buyer lives in the house and rents out one room and the granny flat.

Would be interested in anyone's opinions about helping young ones into property and my analysis. I may have overlooked something.

 

[geoffw]

If you did not structure the purchase of the house as PPOR properly, you may not be able to claim the interest of the loan when you converted it to an IP.

 

[thefirstbruce]

Geoff, please elaborate.

I allowed for an IO loan on a PPOR, which I understand is ok.
I also believe there are complications using offset and redraw facilities on IP loans, so one would have to keep the loan pretty basic.


I should add that in the first year, I presumed rents are paid in cash to the owner, and not declared as taxable income. I know this is very common in reality, when the owner is sharing the house with boarders/renters/friends.

 

[kerosam05]

geoffw,

I am living in my PPOR a the moment and intend to make it as an IP after 12 months. Of course i would have to move out... might want to get another place closer to work.

anyhow, you mean there are requirements for PPOR converting to IP? sort of bugga up my plans then.... well i guess i can use Plan B which is to use that equity on the PPOR to buy the IP.

your comments.

 

[Simon]

Geoff,

Can you explain?

If you own a home then it becomes an IP then the interest is claimable.

Of course some structures are more efficient however I know of none that would prevent the owner claiming the interest.

I am puzzled?

 

[vandalic]

I'm looking forward to the response on this one as well. I am looking at undertaking the PPOR then IP after 12 months situation myself.

 

[DavidMc]

I believe what Geoff is alluding to is that you may lose deductibility on any principle you have repaid.

The potential trap with this one is that if you have paid any principle on the PPOR and then convert it to an IP, any interest you pay on when you redraw that repaid amount will not be tax deductible if it is not used for income producing investment purposes (such as a deposit on a new PPOR).

The (ideal) way around it is to set up your PPOR and an IO loan with a separate offset account and pay your 'principle' (and any extra) into the offset.

You're not totally stuffed if you didn't do this, it's just that you may miss out on some potential tax benefits.

If you've only kept the PPOR for 1 year chances are you've repaid little principle and this loss is marginal. If you've half paid it off then you'll miss out on a lot and you may consider selling it and getting an entirely new IP depending on the sums.

Hopefully I explained that one clearly!


Cheers,

David.

 

[DavidMc]

I forgot to mention, having a separate 'offset' account attached to the loan is very significant in this situation. It is different to having one big single loan that you constantly pay into (salary) and redraw from (credit card sweep, etc) as the tax office views your redraws as 'new borrowings' and it is the purpose of these borrows determines it's deductability.

 

[geoffw]

David,

You've got it- far better explained than I could have.

There may be other ways around it- some people have mentioned renting their PPOR through a trust. I don't know if that is a solution- but it's something you would have had to have done before the house purchase to get full benefits.

 

[dc01]

Watch out with not declaring the rental income as well - it only takes one audit over the next 7 years or a tip off from a disgruntled tenant for ALL the prior years tax bills to be called in - PLUS interest and penalties, and the ATO keeping a watch on your TFN for the forseeable future...