Turning a home into a property investment property

[lostis]

Say I were to follow in the footsteps of these guys and purchase a property to live in with the intent to use it as an IP after 6 months and get tradies to fix up the property whilst im living in it, would I still be able to claim this as some sort of deduction? (that is if your allowed to claim such things as a deduction)

Or would it only apply once I've started receiving an income from the property?

 

[Propertunity]

Say I were to follow in the footsteps of these guys and purchase a property to live in with the intent to use it as an IP after 6 months and get tradies to fix up the property whilst im living in it, would I still be able to claim this as some sort of deduction? (that is if your allowed to claim such things as a deduction)
Or would it only apply once I've started receiving an income from the property?

You can claim some kind of deduction yes, - depreciation on the works and interest costs on the loan you used to pay for the works when it becomes an IP. Keep records.

 

[Perp]

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

I suspect you're thinking of CGT exemption. Once you are using the property as an IP, you're liable for capital gains tax, whereas you weren't whilst you were living it. So make sure you get the property valued (by a registered valuer; not an "appraisal" by a real estate agent) when the change from PPOR to IP happens.

In summary (from a non-accountant, not giving advice, only my understanding etc etc):

PPOR

CGT - exempt, including for up to 6 years of absence in certain circumstances
Income and expenses - not applicable and not claimable

IP

CGT - liable (bearing in mind 50% discount if held > 1 year)
Income and expenses - declarable and claimable - bonus if negatively geared

Note that whilst there is a requirement to live in a property for 6 months to qualify for FHOG, this is in addition to (not an alternative to) having a genuine intention to make the property your PPOR. Thus if you tell anybody that your plan is to "live in it for 6 months to get FHOG then move out to make it an IP", you render yourself ineligible. You definitely don't want to mention it to a co-worker who's pissed off at missing out on FHOG and dobs you in, or something like that. So don't tell your lender, accountant, etc, or take other actions that suggest you never intended to reside there permanently, such as ordering a fixed duration 6-month mail diversion to the new property, etc, or you could find yourself in a very ugly situation down the track.

 

[lostis]

Note that whilst there is a requirement to live in a property for 6 months to qualify for FHOG, this is in addition to (not an alternative to) having a genuine intention to make the property your PPOR. Thus if you tell anybody that your plan is to "live in it for 6 months to get FHOG then move out to make it an IP", you render yourself ineligible. You definitely don't want to mention it to a co-worker who's pissed off at missing out on FHOG and dobs you in, or something like that. So don't tell your lender, accountant, etc, or take other actions that suggest you never intended to reside there permanently, such as ordering a fixed duration 6-month mail diversion to the new property, etc, or you could find yourself in a very ugly situation down the track.

Anyone have stories of these ugly situations?

 

[luke1457]

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

Hi LynnH,
I'm a complete newbie on financial and property matters. This is my first post, actually- just joined because I want to get into IP very soon.

Anyway, could you elaborate on 'personal expenditure'?
Does that include making personal repayments on the mortgage of that IP? ie: repayments on top of the rent income?

 

[LynnH]

Hi Luke - and welcome to the forum!

'Personal expenditure' means any day-to-day living expenses and buying of 'toys' etc that are not related to the property - e.g. paying your phone bill, buying groceries, insuring your car, buying a car/boat etc etc.

The OP was speaking of buying the property as her PPOR and then converting it to an IP several months later. If she were to obtain an 'all-in-one type of loan' with a redraw facility - these commonly involve paying all income into the loan and paying all expenses (personal and property related) using redraw facility - then any interest on the redraws for personal expenses will not be deductible. When the property becomes an IP, her accountant will have to apportion the interest between personal and deductible components every year, and this gets very messy - and expensive!! Also, the amount of deductible interest will decline with time.

A better solution would be to set up a loan with a 100% offset facility - you pay all income into the offset facility and pay all expenses (including loan repayments) out of the offset facility. The balance of the offset account is then 'offset' against the balance of the loan account and interest is charged on the lesser amount. An example: loan balance of $100K, offset a/c balance of $20K, interest is only charged on $80K. And all interest remains tax deductible, since you are only 'parking' your money in the offset a/c to reduce interest payable while you don't need to use those funds.

When you talk about "personal repayments ... on top of rent income", I'm a little confused as to what you mean. It is not necessary to use rental income to pay mortgage payments (I don't want to confuse you, so won't elaborate here) and also any 'personal payments' are not deductible. If I have misunderstood your question, I apologise. I just want to point out that the only component of a mortgage repayment which is tax deductible is the interest component - regardless of where the funds come from to pay that interest.

The above is a very simple example which (I hope) will help you understand the concept of deductibility. Everyone's situation is different and what I've described above may not suit your circumstances.

All the usual disclaimers apply: I'm not qualified to give advice etc. Please see your accountant before you purchase any property and seek advice about how to structure the loan/s to suit your own personal situation.

Cheers
LynnH

 

[luke1457]

Lynn,
Yeah, I think I understand what you're trying to say. We were talking about completely different things, but now I better understand both.

Regarding the 'extra repayments' - I was just talking about making repayments in an IP from my job income even if the rent income covers the monthly repayments.

But this is totally unrelated to that loan type that you and the other poster were discussing.