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Coverting PPoR to IP and assorted strategies

Discussion in 'Investing Strategies' started by Thudd, 5th May, 2008.

  1. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    Hello all,

    First post!

    Great site btw, lots of information here to start the mental gears turning and I'm sure I'll have a lot to think about in the future. But first, to my question at hand, if I may.

    My wife and I have a plan on what we'd like to do, what we lack is information on is the best way to go about it (or not go about it, as the case may be). We'll certainly be talking to an accountant about the best way to set up whatever way we're going to set up, but forewarned is forearmed and if I've got some idea on the right questions to ask then that'd be great.

    We currently take home about $70k p.a. My wife is working part time while doing a uni course so that will increase in due course but not for a couple of years. We have a single mortgaged PPoR and no other debts. We intend to sell our current house (this is a certainty), then the intention is to purchase a place that can be used as an IP in the future but will be our PPoR for the time being (about 18 months to 2 years). In that time we'll paint the place up and do a few minor improvements to make it a more attractive rental.

    At the end of that period we want to make that place an IP. We intend to move interstate to live and will either purchase or build a house there.

    We are looking at potential places to buy that are cheaper than our current house, so when it is sold and we purchase a new one we'll have a wad of cash left over to something with (which we haven't decided yet).

    The medium term goal is that in 5-7 years time we'll have made our move interstate and be established there and there will (hopefully!) be a reasonable amount of capital growth in the IP. At that point we will decide to either sell the IP and use the increase as a 'windfall' (whether that be to reduce any existing PPoR mortgage, invest differently, or whatever), keep the IP as it is if it's increasing nicely or hasn't increased enough, or use the additional equity in the IP to fund additional investments.

    The problem arises, as I'm sure some of you may have guessed by now, is the equity in our about-to-be PPoR when it becomes an IP. We'll need some of that equity to fund either building or purchase of the new interstate PPoR, so the interest will be non-deductible. So how should we best structure things to gain maximum benefit? I've read about the use of offset accounts and LOCs but I'm afraid my head started to spin after a while.

    For example, and I have no idea if this is a good idea or not, how about this. Let's say that our house sells for $500k, mortgage is $100k, new property is $300k. We can purchase the property outright and have $100k left over and no mortgage and we put aside $1k per month as 'savings'. But when we leave and rent it out, if we draw on that $300k equity for our interstate PPoR then 100% interest will be non-deductible.
    But what if we purchase the property at 80% mortgage, create an offset account and put $240k into that for 100% offset. So we pay no interest while it is our PPoR and also earn some interest in the offset account. Then when we move interstate and rent it, we can draw on the offset account instead of the mortgage account. Does that mean we can then claim the interest on the ex-PPoR-but-now-IP as a deduction or are we still stuck?

    Or more importantly, is there a better way to structure things? I'm certain that there is...

    Renting our current place is not an option. Neither is selling our property then renting until we move. One way or another, we are selling our current house then purchasing another. The possibility is very high that we will build a place interstate rather than buy, which means when we move then we'll rent a place for a year or two while building occurs, and can then use the 6 year rule to at least get a partial CGT exemption.

    Hopefully that isn't all too confusing? Feel free to assume I'm an idiot, I won't be offended :)
     
  2. tailcat

    tailcat Well-Known Member

    Joined:
    18th Jun, 2007
    Posts:
    96
    Location:
    Yeppoon
    Thudd,

    Firstly, Welcome.

    Secondly, I want to play devil's advocate for awhile......

    Why is selling the current house not negotiable?

    Personal/private reason is acceptable and tell me to get lost....

    However, if it is based on money then can you please convince me that it is a clear cut case.

    Is the house about to fall down?
    Has the local region definitely reached the top of its market and about to collapse?
    Is the rental appraisal abysmal? 5% would mean $500 a week in rent. That would give $1000+ a month towards your mortgage.....
    There are no purchase costs in getting your first IP NOW...
    .....

    Tailcat
     
  3. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    It's a long story, but essentially:
    - in 18/24 months we're moving interstate regardless;
    - even in the short term, the property values in the suburb have stagnated and even dropped a little in some cases, so we're looking to better utilise the equity in the house somewhere else;
    - opportunity to possibly make use of 6 year cgt exemption;
    - it wouldn't make a good rental (you'll have to take my word for this);
    - we have very good reason to believe that property values in the area will drop sharply in the near future so we're gettin' out while the gettin' is good! And again, you'll have to take my word for it.
     
  4. tailcat

    tailcat Well-Known Member

    Joined:
    18th Jun, 2007
    Posts:
    96
    Location:
    Yeppoon
    Fair 'nough

    Tailcat
     
  5. DaveA

    DaveA Well-Known Member

    Joined:
    19th Feb, 2007
    Posts:
    617
    Location:
    Sydney, NSW
    seems you have things fairly well though out... as long as you see the stamp duty and other costs will outweigh any price falls your in front...

    Whats the % chance of purchasing a ppor interstate rather than renting, what is the estimated value you think it will cost?

    But yes for the PPOR to IP your buying should have a 80% attached to it with the balance put in an offset so you have effectively no interest for the next 2 years. that way when you move out youll have 80% of 400k deductible..
     
  6. Thudd

    Thudd Well-Known Member

    Joined:
    5th May, 2008
    Posts:
    49
    Location:
    Perth, W.A.
    If we decide to buy a block and build, we've set a preliminary budget of $450k and this would mean renting for however long it took for the house to go up. It's our preferred option but the right block has to be available.
    If we buy a house, well again that'll depend on what's available at the time but let's say for argument's sake we allow a $500k limit.

    All figures potentially subject to arbitary non-government inflation :p