When your PPR becomes an IP

[Investor Chick]

Hi guys

I want to convert my PPR (principal place of residence) into an investment property. But I want to make sure I maximise the tax effectiveness of my home loan arrangement.

I am still living in my first home - a flat which I bought on a P&I loan. Soon I would like to move into a house, and rent out my flat - keeping it as a long term investment. It would end up being slightly negatively geared if I was paying interest only.

I probably would have made more sense to have an interest-only loan for my flat, since I always knew it would end up as an investment property. Now that I have paid off a fair bit of the principal, it won't be as tax effective as it would otherwise have been. ie. I could convert it to I/O loan but I could only claim interest deductions relating to that lower principal amount.

My question is - in other people's experience, are you better off selling a place which you have used as your PPR and which you have paid a reasonable level of the principal off, and then re-investing that money elsewhere (ie. either an investment property which you have as I/O from the start, OR a new PPR)? Or is it no big deal to change from a P&I loan to an I/O half way through?

I will be seeing an accountant to work out the exact sums, but I would be interested to learn about other people's strategies in this sort of situation first.

Hope that makes sense.
Thanks for your thoughts...

Investor chick.

 

[Aceyducey]

Investorchick,

Being tax effective isn't the secret to investing. Having too many tax deductions can lead to bankrupcy.

If you are really worried about the dollars you don't get 50c back from then after turning it into an IP, borrow from the equity you've built up & buy another IP.

Cheers,

Aceyducey

 

[Investor Chick]

Yeah - have come to same conclusion - thanks for your reply.

 

[wish-ga]

Hi investor Chick
I will be in your situation too. I have just bought a unit as a ppor and will retain as an ip. I too wanted an io loan for the tax deduction reasons but lenders wouldn't do it this way so had to go with p&i until I move out and refinance as io.

I know down the track the tax deductions won't be the most optimal but perhaps the fact that I bought the unit in a good area for a good price and will get a decent yield may sweeten the pot.

I think that a good property over the long term is a great investment so keeping it may be better than selling just for tax deduction reasons.

 

[Investor Chick]

Trust or not?

Thanks for sharing your thoughts Wish-ga.

I've done a lot of analysis and agree that it pays to hold on to a good investment despite lower deductions... and the fact you've paid off some of the principal is a handy way of increasing your yield (and cash flow) which helps you to cover the cost of the next IP.

The next issue to look at is whether it is more effective to transfer the apartment to a trust, and cop the stamp duty now, in order to offset the positively geared rental against my next (negatively geared) investment. Haven't done the sums yet but I gather that I'll be worse off in the short term but better off in the long term if I do that. The alternative is to buy the next IP in the same name as the first flat and offset the two, missing out on the tax benefits (and asset protection) of the trust structure.

 

[Qld's007]

Investor Chick

As well as incurring additional stamp duty you may also trigger a CGT when you change the holding structure dependant on when you purchased the property.

Ensure you weigh up all the +'s & -'s prior to any changes and if in doubt consult an Accountant.

 

[Investor Chick]

Thanks Richard. I assume that CGT won't be payable since it has been my PPoR since I purchased it a year ago. Will definitely look into all associated costs before changing to a trust. It might just be the case that I start acquiring through a trust from now on and leave this one out of it.