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Can I rent my priniciple place of residence and move in new IP?

Discussion in 'Real Estate' started by vsdabhi, 6th Oct, 2009.

  1. vsdabhi

    vsdabhi Member

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    Perth WA
    Hi,
    I am going to buy a 2nd IP, it is 4X2 property. I need to spend @20K before I move in or rent it out. I live in 3 X 1, my family need more rooms. I have lived in my priniciple place of residence for 18 months. I bought it for $415K and market value is $540K now.
    Can anybody advise me whether I can move in IP and do renovation or I should renovated first and move in or I can not do it except renting it out?
    Is there any post related to my question?
    Actually my plan is to buy IP now and move in during Christmas holidays. Currently it is rented by students and they want to stay till Christmas.
    Thanks a Lot.
     
  2. TryHard

    TryHard Well-Known Member

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    You can do anything you want, but can only claim interest deductions on money that was borrowed for the purpose of earning income. So there may be some lost opportunities in a PPOR that becomes an IP, if you have paid down some of the debt. Renovating an IP before moving in won't achieve much as the best you'll be able to claim is a small amount of depreciation until you stop using it to generate income. Hope that is what you meant ?
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Another thing to keep in mind is that you can move our of your current PPOR for a period of up to 6 years and still claim CGT-free status on it - but there are implications in doing so.

    You get to elect which property should be treated as your PPOR for CGT purposes (you can only have one). This doesn't affect the deductibility of interest and other expenses though - you can only claim those if the property is available for rent.

    You need to consider whether the capital growth on your current PPOR is going to be worth more than the growth on the IP you plan on moving into. You can continue to claim CGT-free status on your current PPOR when you move out for a period of up to 6 years - at which point CGT liability starts accumulating on the property (payableonly when you sell). If you do this though, the new property you buy will not get any CGT-free status even though you live in it (until the other place loses its CGT status).

    It gets a bit complicated and which option is best depends on making a few assumptions - it might be best to speak to your accountant to help you work this out if you want to take advantage of it.

    If it's all too difficult, don't worry - by default, you will start accumulating CGT liability (payable when you sell) when you move out of your current PPOR, and the IP you buy will stop accumulating CGT liability when you move in - get them both valued when you move from one to the other to use in future CGT calculations if/when you sell either of them!

    In relation to your original question - interest and expenses for the new property you are planning on buying will not be deductible while it is not available for rent ... this means that while you are renovating it, you can't claim any expenses - regardless of whether you live there or not.

    The costs of the renovation are not directly deductible, but you might be able to claim depreciation on any improvements you make if it ever becomes an IP again ... keep all receipts just in case you decide to move out and rent it out again.
     
  4. navjit6

    navjit6 Active Member

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    Brisbane, QLD
    Hi Sim,

    Just a quick question:

    My cousin bought a PPOR in 2003. Used as main residence until 2006. Then she bought another property in 2006, which became her PPOR and the first property was rented out as IP. she is considering selling the IP, Would she have to pay CGT on it? I would say no as the 6 years havent been up? but would that then affect the CGT on the current property?
    your help is appreciated. thanks

     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    You can only have one PPOR - but you do get to choose which property is your PPOR (within certain limitations).

    If you have a PPOR which you move out of and rent out, you can keep claiming that property as your PPOR for up to 6 years, even if you buy a new PPOR and live in it.

    However, if you do this, your new PPOR will NOT be CGT-free for the period that you claim CGT-free status of the old PPOR.

    She will accumulate CGT liability on one or the other - but she does get to choose which.

    It can be tricky to work out which will be the best to claim the CGT-free status on, it depends on guessing the growth rate of the new property and working out when she thinks they will sell it.

    In general though - I think it would be worth looking at claiming the old property as a PPOR for as long as possible (up to 6 years after moving out), so that when you sell you don't have to pay any CGT at all. More money in the hand now is worth a lot compared to a CGT liability on the new PPOR that you can defer paying indefinitely (you don't need to pay it if you don't sell the property!).

    However, there are some situations where it might be better to pay the CGT now - such as if there are capital losses carried forward from previous years, you can use these to offset the capital gains and reduce the overall tax payable.

    It depends on a lot of things and getting professional advice is well advised!
     
  6. navjit6

    navjit6 Active Member

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    Thanks Sim!!! Say that after moving out of PPOR in 2006 (renting it out), and if she was to rent somewhere else or live with her parents for three years, and then is thinking of buying PPOR in 2010. if she sold the first property before buying the other house then she would have no CGT liability for any house?

     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Correct - this is similar to what we did.

    Bought a PPOR, lived in it for 9 months before moving interstate for work where we rented instead of buying. PPOR became an IP. We sold it (to our trust) before 6 years had elapsed since moving out and did not have to pay any CGT on the sale.
     
  8. navjit6

    navjit6 Active Member

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    If living with parents/family/friends and not paying any rent, then still no CGT?

     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It doesn't matter whether you are renting or living in a tent - just so long as you don't buy another property to live in and want to claim it as your PPOR for capital gains tax purposes, then there is no CGT liability on the ex-PPOR for up to six years after you move out.
     
  10. navjit6

    navjit6 Active Member

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    thanks heaps :)