Title & Tax Return

Discussion in 'Accounting and Tax' started by countryrock, 14th Jan, 2011.

  1. countryrock

    countryrock Member

    14th Jan, 2011
    Hi, can anyone out there help with my query?
    My wife & me are looking at purchasing an investment property in WA with the land title as tenant in common.
    We plan to have the bank loan as 100% in my name (negative gearing purpose) with my wife acting as guarantor, as required by the bank.

    Can anyone advise:
    1) For our tax return, how do we split the rental income & loan interest? My wife does not have any other income.

    2) If we intend to move into this new IP after 4 years of renting it, we are considering 2 options.
    Option 1 is to sell our current Principal Place of Residence (to be subject to CGT? Currently living 5 years) & move into the IP (which will become our PPOR).
    Option 2 is convert our current PPOR to IP and moving into the new property which will now be our PPOR.
    Which option would be more advantages from a taxation perspective?
    What is the criteria to define when a property is PPOR?
    Type of documentations that are required to support our claim?

    Thank you in advance.
  2. buzzlightyear

    buzzlightyear Member

    7th Feb, 2004
    For tax purposes, all rental income and expenses are allocated according to the ownership split.

    For joint tenants it is an obvious 50-50%. For tenants in common it will be split in line with the ownership split whether that is 20-80, 30-70 etc.

    OPTION 1
    Rent out your new IP (P2) for 4 years and live in current PPOR (P1) for that time and you then sell P2 and make your P1 into your PPOR.

    P1 is not subject to CGT when you sell (if it hasn't been rented out previously). P2 would then become you PPOR. P2 will however have attached a CGT liability if and when and if you sell. This will be apportioned based on the time (days) that the property was an IP divided by the amount of days owned at sale.

    OPTION 2
    Making P2 into PPOR, would mean that the existing loan against P1 (now an IP)would be deductible. However, any equity extraction from P1 to purchase P2 and any other stand alone loan facility against P2 would not be deductible as this is a PPOR.
    The second option, would give you two properties, and therefore based solely on the narrow criteria of tax deductions second option scores higher.

    From a CGT perspective, P2 would be CGT free if not rented at any time because it was a PPOR from settlement. P1 would be subject to CGT based on the value (a real estate estimation is adequate) at the time it became an IP. eg in a simplified example, it was first purchased at $200k, when rented it was valued at $300k, sold at $400k, and you sold over 12 months since it was rented to become eligible to the 50% CGT discount, your CGT would be $50k.

    However making a choice on tax deductions alone isn't a wise investment choice, which you would no doubt know. But at the same time, moving PPOR's is just as much of a lifestyle decision now and into the future.

    It is a matter of evidence/intent as to when a property is a PPOR. Have you connected utilities at the property in your name,, are you on the electoral roll in the area, do you receive your mail there, do you have receipt of movers taking your belongings to the property.?
    Here's some ATO links that will help.

    Do you own more than one property

    Records relating to RE
  3. Ms Jade

    Ms Jade Down the Rabbit Hole

    11th Aug, 2004
    Mornington Peninsula
    The split is based on the % of ownership. So if you are designated as 95% & your wife as 5%, the rent will be split 95:5. I'm pretty sure that the loan interest can be treated exactly the same way.

    You're welcome.
    Last edited: 14th Jan, 2011