Converting Principal PLace of residence to Investment Property

Hello All

This is my first post here, so Hello All. OK, my question is, can I buy a property(my first one), stay in there for 6 months, get my First Home Buyers Grant and then nick off from that property, and then make it an investment property and put it for rent. Reason for doing this - SO i get my initial grant, and after that I can start getting deduction on interest and other expenses.

If this can be done, is it a tedious and expensive process to convert from Principal PLace of residence to Investment Property.
Will really appreciate any guidance..

Thanks in advance
Namit

 

Hey Namit,

I'm fairly inexperienced with this so you'll want more info than what I can give you, but we changed ours after 12 months and there was no hassles at all. Don't bother telling the bank unless you need to change to interest only, we haven't told them. To get the most out of your time with the property as your PPR, find a realestate agent to give you as high a value as possible in writing at the time you change it to an investment property, that way if and when you do sell, only the value above that amount is due for CGT. It's perfectly acceptable to get that value from a realestate agent and not an official valuer. Hope that helps.

 

I'm planning to this as well! One of my questions is who do I notify that I am living in the property?

I'm likely to want to move back home after 6 months (like Namit) so I only want to change addresses for the minimum as possible...

Do I just notify the ATO - and leave my pay slips, bank acccounts, etc with my address as my parents place?

 

Namit,

Yes it can be done, and its an easy process to change from PPOR to IP.

Here's some more info on eligibility in VIC:

First Home Owner Grant - General Information

Specifically:

Cheers,
Michael

 

You don't actually need to inform anyone. Just start declaring the rent and claiming the costs on the next tax return.

If you don't buy another home, but move back in with mum and dad you will get another 6 years CGT exemptions after you move out of your home and rent it. When you do buy another home the exemption stops on that date and applies to your new home.

I suggest you guys are considering a major financial step and a little more research may be in order

 

Thanks a lot everyone. That is some good information you all have given me. I might consider doing that then, cos it gets me best of both worlds...Thanks a lot again.

Cheers
Namit

 

Hi Namit,

Another thing you can do is set your loan to Interest Only with an Offset Account. By depositing all of your income and savings into the offset account, you are only paying interest on the difference between the loan balance and the offset account balance. So it allows you to have the benefit of paying down the loan while you are living in it, without actually paying any principle off the loan at all.

By not paying any principle off the loan this may have a tax benefit for you when you convert it to an investment property by enabling you to claim an interest deduction on the full loan balance (this is not tax advise, please discuss with your accountant).

Obviously this strategy assumes you have either a relatively large lump sum deposit to put in the offset account, or you have a good surplus cashflow every month to make it work.

Also make sure the offset account is a 100% offset account and not a partial offset account.

Cheers,
Peter

 

What about the PPOR Concession? There is a PPOR Concession Statutory Declaration (Duties form 53A) that states that one is eligiblie for upto $3100 in concession:

If you entered into a contract to purchase your home on or after 1 January 2007, you may be entitled to the PPR concession if you:

1. Use the property as your PPR within 12 months of becoming entitled to possession of the property (which usually occurs at settlement), and

2. Reside in the property for a continuous period of at least 12 months.


It also states that:
"You ARE required to COMPLETE THIS FORM IF:
-You have entered into a contract sale on or after 6 May 2008; AND
-The total purchase price is more than $130,000 but not more than $550,000; AND
-You have purchase a) an existing home or b) land on which a home will be built; AND
-The property purchased will be used as your principal place of residence within 12 months of becooming entitled to possession of the property.

If your moving out after the 6months of occupancy, that means you wont be eligible for the PPOR concession, but ARE YOU STILL REQUIRED TO COMPLETE THE PPOR CONCESSION FORM?

http://www.sro.vic.gov.au/sro/SROWebSite.nsf/taxes_duties duty concession ppr.htm

 

I'm considering this option as well. I've started to build a deposit to go with the FHOG - What % of the property value should I be looking for in my savings account before I consider this (does that include the 17k (vic) grant). Also if I am living in the property for the first 6 months as PPOR is it an issue to rent out say a room depending on the house - does that affect anything?

 

Hi Davo

The ATO will take a very dim view of you deriving any income from your PPOR and yes it will affect both your capital gains and grant eligibility. After all, the grant is meant to be a headstart for those home owners who don't get entitlements to tax deductions on property, unlike for investment purposes. Any income derived (ie: rent) will also need to be declared for tax purposes so it's best to speak to your accountant if you want to go down this path.

On the other hand, if you're simply allowing a friend to stay for 6mths, who's happy to gift you a nominal sum or other goods for his time spent living in your abode, then that may be a different consideration altogether. It all depends on who you're thinking of house sharing with...

 

Thanks for your reply, i was thinking along the lines of a friend or family to 'rent' a room or similar, in regard to a unknown tenant i thought renting out a spare room in a ppor was at least reasonbly acceptable. By what you have said i guess not. After the six months is there any reason that i can't move back out? I know it is not designed for this but legally is it ok? Also with the 'gifted' money would that be considered income for tax purposes?

Many thanks,
David

 

Hi Dave

Here's the guidelines from the Vic OSR site:

First Home Boost

YES, it's ok to move out after this period as 6 mths is the minimum requirement, though talk to your accountant further if unsure.

Gifting isn't looked upon kindly by the ATO in these circumstances so it will more than likely be counted as income. Best to talk to your accountant to consider your options here. Do you have a good one?

 

Hi Jacque,

Unfourtunately I do not have a good accountant, I used HR block last year but I think I should change perhaps to a local one or similar not sure how to figure out if they are 'good' or not though.

I suppose it being considered income is not so much an issue just more tax, however my main concern is my ability to service / get a loan. With my current income I am unsure if I am able to get the amount I would require for a suitable property. I have used the borrowing power calculators around, and have got significantly different results depending on the institution. Are these calculators accurate? Also will the size of my deposit increase my ability to loan moreso than just increasing the total size of deposit + loan?

Not overly relevant to the topic I know sorry!

Cheers,
David

 

Hi again Davo

Get yourself a property investor savvy accountant- I'm sure members on here can recommend someone in Melbourne for you.

2nd port of call is to speak to a broker about your finances- they're probably the best person to help you sort out affordability issues.

 

Thanks again Jacque, if anyone happens to read this and does know a good accountant around the bentleigh area - please let me know! (ill find a more appropriate place to ask for one)

In terms of a broker, I actually work in a bank and as such get some advantages in terms of no fees, rate discount (small one but still). Would there still be a benefit in talking to a broker? If so what benefits could they provide?

Thanks again you guys have been extremely helpful!
David

 

Hi Davo,

You can ask your branch lender and planner if they know of any good accountants in the area.

Cheers,

Dan

 

You've probably found out by now that the period that you have to stay in the home is 12 months to recieve the 50% CGT concession

Andybob