Turning a home into a property investment property

[Jodie]

Hi Everyone,

I am new to the property market and i am having difficulting seeking some info. I am wanting to buy a property in Melbourne, Vic, Australia with the intent of making it my first home so i can take advantage of the first home buyer's grant. After 6 months which it the legal requirement to live in it to receive the first home buyer's grant, I am wanting to turn it into an investment property. I have been told that if i do this then i will not be able to claim the interest back as a tax deduction as the 'purpose of the loan' was for home rather then an investment. Is the 'purpose of the loan' relavant and if so is there anyway around this, i will be buying the property on my own. Being new to all of this i am getting conflicting information depending on if i go to the bank, tax office/account or morgage broker would really appreciate any feedback

 

[Simon]

the purpose of the loan was to buy that property.

Once that property makes you a return then the interest is deductible.

We have all done this at some time.

Cheers,

 

[Peter_Tersteeg]

Simon's advice is accurate. When the property is earning (or showing intent to earn) an income, the costs associated with that property are tax deductible. The original intent of the loan is not relevant and frankly I wouldn't disclose to a lending institution what your plans are because it usually doesn't fit their idea of what you should be doing with the grant.

Care should be taken with the finance however. Make sure it is set up properly to take advantage of the tax deductions in a way which will work for you over the long term. The wrong structure could mean that you may not get all the deductions you're entitled to and repairing it later could be costly and may still not get the desired result.

This shouldn't be taken as financial or tax advice, but I've seen many people do it successfully.

 

[LynnH]

Further to what Peter has said about finance, make sure that you keep your property loan completely free of any personal expenditure - this 'contanimates' the loan and makes part of the interest non-deductible when the property becomes an IP. Very messy and expensive to sort out, so best avoided.

Cheers
LynnH

 

[newbie1]

Sorry, probably a no brainer to you guys & i might not of thought this through properly but can you please clarify the earning = tax deduction bit?

I was under the impression that once you start getting an income from the property you can no longer claim deductions? I'm hoping to turn my home into an IP soon which will be positively geared but was advised that by doing so means i pay tax but not able to claim any deductions? personally i would prefer to make money and pay tax rather than the other way around - but do i have this wrong?

 

[LynnH]

newbie

I'm not quite sure what you mean when you say "that once you start getting an income from the property you can no longer claim deductions". You cannot claim any deductions for a PPOR because you are not receiving any income from it.

Once your PPOR becomes an IP, you can claim exactly the same things as you could claim if you bought it as an IP initially. You declare the rent as income and you are entitled to deductions for all the expenses that you pay in relation to the property: interest, rates, land tax, property management fees, repairs, maintenance etc. Under certain circumstances you can also claim a deduction for non-cash expenses like depreciation. (This list is not exhaustive, but will give you some idea).

Does that help?

Cheers
LynnH

 

[Pushka]

I was under the impression that once you start getting an income from the property you can no longer claim deductions?

As Lynn said, the opposite is actually the case.

 

[newbie1]

Perfect, thank you! I dont know where i was told that positive gearing means no tax deductions. I think i interpreted it wrong when soemone was talking about negative gearing to get the tax breaks on their high income...

 

[Pushka]

Perfect, thank you! I dont know where i was told that positive gearing means no tax deductions. I think i interpreted it wrong when soemone was talking about negative gearing to get the tax breaks on their high income...

Ah, I get where you are coming from. The term 'negative gearing' relates to the overall position of where you are after income (rent) and deductions (eg interest) have been calculated. If you are positively geared you have earned more rent than deductions.

 

[Peter_Tersteeg]

The term gearing suggests that you are getting tax deductions, or that they are applicable to your circumstances.

Positive or negative just refers to your cashflow position. The tax deductions are still applicable.

 

[spiloba]

What about if you are living in a property and renting rooms out of it as well. Does this allow you to have it as your ppor as well as claiming tax deductions as you would with an investment property?

 

[Propertunity]

What about if you are living in a property and renting rooms out of it as well. Does this allow you to have it as your ppor as well as claiming tax deductions as you would with an investment property?

Yes, but be careful as you will probably lose the CGT exemption that you get with a PPOR that is not used to earn an income.

 

[spiloba]

Thanks for your answer. But if i never sold it, all would be swell then wouldn't it?

 

[Propertunity]

Thanks for your answer. But if i never sold it, all would be swell then wouldn't it?

Yes, I'm a big advocate of 'never sell' - and Yes YOU would be swell too UNLESS:
1. The govt. of the day gets tired of waiting for you to sell to trigger CGT and just invokes some legislation to let them tax your gains along the way.
2. Might be swell for you but maybe not so swell for your beneficiaries - although you won't be around - so do you care?
3. Your circumstances may change and you do end up selling

Just things to consider before making a decision.

 

[spiloba]

Good things to consider.

I think my biggest worry would be the government imposing some form of tax.

I am planning to be an advocate of buy well and never sell. As for inheritance they should be happy with what they get.

Thanks again for answering the original question as I am trying to see if it is feasible to buy a new unit to make the most of the fhog as well as get the most out of a depreciation schedule.

However prices around my area (sutherland shire) are pretty steep. Considering low capital gains and fairly average rental yields.

 

[Propertunity]

However prices around my area (sutherland shire) are pretty steep. Considering low capital gains and fairly average rental yields.

So who says you have to buy in 'your area'? You only have to stay in wherever it is for 6 months and then make it your IP.

What kind of budget were you looking at? may be able to point you in a direction.

 

[spiloba]

These have also been my thoughts. I Probably would be able to secure about 500k in terms of a loan. So was hoping to diversify from the outset with multiple units. Seeing that i am 23 with no responsibility, i am also fairly keen to take some risk. And yes, any ideas would be appreciated as well as any research tools you would recommend. (I have already been reading 2-3 wealth creation/investment style books for the last 3-4 months)

 

[Propertunity]

So was hoping to diversify from the outset with multiple units.

I don't think they'll let you do that with the FHOG

Seeing that i am 23 with no responsibility,

I think you are being responsible by reading books and this forum and taking some responsibility for your future

i am also fairly keen to take some risk.

Welcome to the world of investing. All investments carry some risk. Just make sure you engage in some risk mitigaton techniques along the way.

And yes, any ideas would be appreciated as well as any research tools you would recommend.

Lots of research tools listed in Information Resources - and good internet sites with free data & tools

(I have already been reading 2-3 wealth creation/investment style books for the last 3-4 months)

So, how you been sleeping? Kinda gets into the blood after a while hey?

 

[spiloba]

Yeah was actually considering buying solely ip's for the moment and saving the fhog for later in life. But when i heard you didn't get the stamp duty i am now thinking twice.

Mate sleep is a killer, when you need to get up at 4:30 for work and have been reading till midnight. But knowledge is power. The fact that so many people i talk to have no inclination to build wealth through investments makes me think how much easier it will be with these blokes on the sidelines.

I must admit though, i am finding it very hard not to be emotional with my first property purchase. Thinking i will make my first purchase in the wollongong area which i think is out of your speciality unfortunately.

 

[Propertunity]

Thinking i will make my first purchase in the wollongong area which i think is out of your speciality unfortunately.

There's nothing wrong with the 'Gong for investing. You might feel more comfortable with it as you live in the Shire and its just a short run down the F6 from there.

After you get over the emotional 'first one' or 2 or 3 (by 3 you tend to settle a bit) - then you realise that you can do this PI stuff anywhere in Australia

Cheers.