Tax implications of renting out PPOR?

An opportunity has presented for us to buy a property with view to doing a reno and flipping it in 6 months. We are considering renting out our PPOR and living in the fixer upper Then moving back into the PPOR. We owe bugger all on the PPOR and would use some of the equity to fund the reno.


I am the sole earner and we currently have 2 cashflow positive IPs and.PPOR is owned 50/50.

The idea being that the rental income from PPOR will help in defraying the holding cost of the fixer upper.

I suspect there are heaps of tax issues here as follows:

Can we elect which property is our PPOR?
What interest costs are tax deductible ?
Can we get a tax deduction for the reno costs?
What will be the CGT implications when we sell the fixer upper?

and more?
 
Can we elect which property is our PPOR?
What interest costs are tax deductible ?
Can we get a tax deduction for the reno costs?
What will be the CGT implications when we sell the fixer upper?

I'm far from an expert, but here is my two cents.

1. You have to live in the fixer upper for 12 months for it to become your PPOR.
2. Once your PPOR gets rented out then the interest you are paying on the mortgage of that property is tax deductible.
3. If the fixer upper becomes your PPOR then you can only deduct the depreciable items once it becomes an IP again after you move back in to your original PPOR. The reno is not for the purpose of gaining an income as it's your PPOR at the time of reno.
4. If the fixer upper is your PPOR, then there will be no CGT. However, if you move out and it becomes an IP before you sell it then there will be.

I'm sure other will correct my errors, but I thought I'd have a go!!
 
I'm far from an expert, but here is my two cents.

1. You have to live in the fixer upper for 12 months for it to become your PPOR.
can you cite any authority for this? I disagree

2. Once your PPOR gets rented out then the interest you are paying on the mortgage of that property is tax deductible.
Only on the loan used to purchase the PPOR
3. If the fixer upper becomes your PPOR then you can only deduct the depreciable items once it becomes an IP again after you move back in to your original PPOR. The reno is not for the purpose of gaining an income as it's your PPOR at the time of reno.
Yes, not deductible while living there.
4. If the fixer upper is your PPOR, then there will be no CGT. However, if you move out and it becomes an IP before you sell it then there will be.
It could be subject to CGT if the other property is claimed as the main residence. But interest and other costs could be used to reduce CGT.

I'm sure other will correct my errors, but I thought I'd have a go!!

Slight correction above in bold.
 
can you cite any authority for this? I disagree

No I can't Terry. I'd have to do some research on the topic. I was basing it on the rules to qualify for grants and the like.

I'll leave that to the professionals to discuss.

I'm happy that I only got a small amount of bold!
 
The flipping strategy for CGT can work. However in some states there could be land tax issues and issues with grants etc subject to thresholds of course. Then there is the practicality - If the property has no occupancy certificate and is a dump then occupation may be illegal and the main residence may not actually be satisfied. If its just run down and cosmetic work only then I see no issues beyond the former PPOR being tenanted.

With respect to grants I'm unsure that anyone with two IP's (one a former PPOR) can access any first home or other concessions (its not a new build) so that comment puzzles me.
 
With respect to grants I'm unsure that anyone with two IP's (one a former PPOR) can access any first home or other concessions (its not a new build) so that comment puzzles me.

What I was talking about was that you need to live in a place for 12 months to qualify for all the grants, so that is where I got the 12 months from for the PPOR status.
 
What I was talking about was that you need to live in a place for 12 months to qualify for all the grants, so that is where I got the 12 months from for the PPOR status.
12 months is pretty common misconception. ATO is very clear that is not the case:

the length of time you live there - there is no minimum time a person has to live in a home before it is considered to be their main residence
https://www.ato.gov.au/General/Capi...-estate/Is-the-dwelling-your-main-residence-/
 
The flipping strategy for CGT can work.

So are you saying that to avoid the whole, taxed under the income tax regime as its a profit making intention can be avoided just by living there and making it your main residence?

Surely the fact that they are going to live there doesn't remove the fact that they are going to flip it in 6 months?
 
Thanks for the link Perthguy, that's got me sorted.

By the looks of it, if it is their PPOR from when they buy it until they sell it six months later then the sale is CGT exempt.
 
Thanks for the link Perthguy, that's got me sorted.

By the looks of it, if it is their PPOR from when they buy it until they sell it six months later then the sale is CGT exempt.
It might not be that simple. I was just pointing out that there is no '12 month rule' as is commonly cited, not the same as saying the sale will be CGT exempt. I can't say if it will or will not be. For example, if they are planning to renovate, there are some specific rules that apply.
https://www.ato.gov.au/General/Capi...-estate/Treating-land-as-your-main-residence/

The ATO could also see the activity of buying a house, renovating it and selling it as a "one-off profit-making activity". See last example on this page:
https://www.ato.gov.au/General/Capi...n_business_or_doing_a_profit_making_activity_

I suggest specialist tax advice from a professional with specific experience in this area. Getting it wrong could turn out very expensive.
 
Thanks for the link Perthguy, that's got me sorted.

By the looks of it, if it is their PPOR from when they buy it until they sell it six months later then the sale is CGT exempt.

Yes probably as long as the other criteria are met:
- less than 2 hectares in land
- no income producing
- no other property counted as the main residence at the same time.
 
Hi All,

Thanks for the respones the links were helpful too.

My understanding so far is:

1. We can elect to keep our PPOR as a PPOR whilst we live in the house we have bought to renovate. This preserves the CGT free status of our PPOR.

Will the rent from the PPOR be assessable income and any expenses incurred while rented be deductions,?- I think yes because there is no free ride.

2. If we undertake the renovation of the second house in a businesslike manner any profit on sale will be assessable income which we would split 50/50. Wife has no wages so we get the benefit using her tax free threshold up when calculating tax payable.

Does this mean that we can claim the expenses incurred including interest, in the renovation of the second house as deductions because we are carrying on a business?

Cheers
 
Something to consider is the way you structure the purchase and the loans to be the most tax effective. For example, it may be more tax effective to buy the house in a trust? Just pointing out something else to consider. I can't advise you which way to go. Terry might be able to advise further with regard to trusts.
 
Something to consider is the way you structure the purchase and the loans to be the most tax effective. For example, it may be more tax effective to buy the house in a trust? Just pointing out something else to consider. I can't advise you which way to go. Terry might be able to advise further with regard to trusts.

This sounds like an ownership structure rather than structuing the loans.

It is generally not tax effective to buy a residence in a trust if it will be the main residence as there is no main residence CGT exemption and often land tax payable even if living in it.
 
This sounds like an ownership structure rather than structuing the loans.

It is generally not tax effective to buy a residence in a trust if it will be the main residence as there is no main residence CGT exemption and often land tax payable even if living in it.
Yes, that's right Terry. I was thinking of a tax effective ownership structure for option 2 a couple of posts above:
2. If we undertake the renovation of the second house in a businesslike manner any profit on sale will be assessable income which we would split 50/50. Wife has no wages so we get the benefit using her tax free threshold up when calculating tax payable.
If deepindebt took that option, I was wondering if it could be more tax effective to buy the property in a trust?

I see two different scenarios emerging.

1. the property is purchased in private ownership, elected as a main residence, renovated and sold. Ownership percentages for each partner have not been discussed but a couple of posts above it was hinted at 50% each. This may not be the most effective ownership arrangement. Depending on the time taken to complete the renovations and the sale, the original main residence could lose main residence status. The new residence may be able to be treated as a main residence for tax purposes.

2. the property is purchased in some kind of trust structure? The purchase, renovation and sale is treated as a business and end income distributed according to the trust deed instructions. The current main residence would not lose main residence status.

Now, these are two very different scenarios and there is a lot more involved in each one than I even understand. I would not know where to being trying to work out which would be a better option for deepindebt. This is where I know that people really need to track down a specialist tax accountant to explore the options and provide the proper advice. The right advice is likely to save much more than the cost of that advice. I don't mind people thrashing out their ideas on a forum but there is no way I would put pen to paper on this deal without professional advice.
 
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