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Discussion in 'Loans & Mortgage Brokers' started by Lam Thieu, 13th Feb, 2008.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    For the rest of your life? I'd think that would be the case only if you are living in it for the rest of your life ???
     
    Simon Hampel, 5th May, 2008
    #81
  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    It's not deductible until she moves out and makes it available to rent (ie it becomes an IP).

    The whole point of the exercise is to maximise the deductible borrowings in the future once it does become an IP - and the best way to do that is to not pay down the loan in the short term (ie use an IO loan).

    You can still get the interest-savings benefit in the short term by using an offset account (rather paying down the loan), and in the longer term get the tax-deductibility benefits by using an IO loan which eventually becomes an investment loan.
     
    Simon Hampel, 5th May, 2008
    #82
  3. BillV

    BillV Well-Known Member

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    Ok, but then you will never be able to transfer the equity of this property into your next PPOR. That's the power of an offset.
     
    BillV, 6th May, 2008
    #83
  4. Lam Thieu

    Lam Thieu Well-Known Member

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    So for a property to be CGT free....do i need to claim it as a PPOR straight away when I purchase my first ever property?

    Or can it also be CGT free if I use it as an investment property when its first transferred over....but then transfer it to PPOR down the track, and live in their for a consecutive one year (or rent out for 5 years and move back in...etc)....and then if i decide to sell...that the property would be CGT free if i don't latter claim something else as a PPOR?

    My parents are under the impression from their accountant that I can only make this CGT free if i take advantage of this right from the start and claim it as PPOR.

    So if people know that they are going to sell an investment property....to dodge CGT, what they need to do is to just make that property PPOR and live in their for a year....is that right?....it doesn't matter about timing whether its at the start or anywhere during your holding of the asset?
     
    Lam Thieu, 6th May, 2008
    #84
  5. Lam Thieu

    Lam Thieu Well-Known Member

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    Instead of an interest only loan....does the concept also work if I decide to go for a P+I loan with offset?
     
    Lam Thieu, 6th May, 2008
    #85
  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    Yes - you need to live in the property first before it becomes an IP.

    The ATO does not specify how long you need to live in the property - although 1 year seems to be the consensus as to a good length of time.

    In our situation, we moved out after only 9 months - but we moved interstate for work, so it's pretty clear-cut as to the reason behind the arrangement.

    Once you move out, you only get 6 years of continuing to claim it as your PPOR (assuming you don't buy another property which you also claim as your PPOR within that time period). After the 6 years is up, CGT starts accumulating again (you'd need to get the property valued at that point to set your cost-base for future CGT calculations).

    Now, if you were to move back into the property before the 6 years is up, you reset the clock ... however you'd want to make sure you have a sound reason for doing so and stay there for a decent amount of time, otherwise the ATO may take a dim view of your actions. On the flip side - moving back into an IP will upset the deductibility of various expenses during that period and cost you a lot in accounting fees to sort it all out! I don't recommend this course of action unless you plan on living there for an extended period of time.
     
    Simon Hampel, 6th May, 2008
    #86
  7. Simon Hampel

    Simon Hampel Founder Staff Member

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    There are two problems with P&I loans:

    1. they cost you more from a cashflow point of view - you have to pay principal as well! More the point, you have to make these payments at the time the bank chooses - you lose control of that part of your cashflow. If you really really want to, you can still usually make principal repayments on an IO loan - but you control when and how much.

    2. if you want to redraw the equity you have built up in your PPOR as a result of those principal payments - and you use this money to buy an investment property ... the tax deductibility of that borrowing is questionable since you will continue to make payments on that loan - the loan is now mixed use and therefore problematic from a tax point of view. You can generally get around this by using a separate loan facility for new drawings (most lenders will let you split your loan accounts to keep the borrowings separate) - but it's best to avoid it in the first place.
     
    Simon Hampel, 6th May, 2008
    #87
  8. BillV

    BillV Well-Known Member

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    Yes but the key to this is to borrow as much as possible.
    so you have money leftover to put into the offset
     
    BillV, 6th May, 2008
    #88
  9. Lam Thieu

    Lam Thieu Well-Known Member

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    Yes - you need to live in the property first before it becomes an IP.

    So does that mean that if claim the transferred property as an investment property straight away (my first every purchase)....then there is no way i could make it a CGT-free asset...????.......so you are saying, that there's no way I could make it a PPOR down the track and then live in there before selling?

    In short, why does it need to be right at the start? and does it have to be on your first ever purchase?
     
    Lam Thieu, 6th May, 2008
    #89
  10. Simon Hampel

    Simon Hampel Founder Staff Member

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    If you buy a property and rent it out, it will be subject to CGT when sold.

    Now, if you subsequently move into it and make it your PPOR, then for so long as it is your PPOR (or for up to 6 years after it stops being your PPOR provided you don't get a new PPOR during that time), it will be CGT free.

    However - you will still owe CGT for the period it was not your PPOR. This can be complicated to calculate - accountant advice required there. Effectively, you would have it valued at the time you move in to determine the capital growth for the period it was an IP.

    Example (overly simplified):

    1. buy a property worth $300K, and rent it out

    2. move into the property 3 years later and make it your PPOR, value is now $400K

    3. live in the property for another 20 years as your PPOR, value is now $1.6m

    4. sell the property and move to the coast

    When you sell, you will be liable for CGT on the 400K - 300K = $100K of capital growth you achieved when it was an IP, but there will be no capital gains tax on the remaining $1.2m of growth while it was your PPOR.

    NOTE that the ATO may require you to calculate the CGT liability in a different way - I'm just using this as a simple example of where the liability arises from - not as an example of how much you are likely to pay - professional advice required.
     
    Simon Hampel, 6th May, 2008
    #90
  11. Lam Thieu

    Lam Thieu Well-Known Member

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    So Is there a way I could claim this as a PPOR and start from Day 1 to claim it as a CGT-free asset......and claim FHOG along the way....

    ....while still being able to utilise the the offset concept with interest-only loan...

    I can't see how i could combine the two? since an interest-only loan means for investment purposes.
     
    Lam Thieu, 6th May, 2008
    #91
  12. Simon Hampel

    Simon Hampel Founder Staff Member

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    You can get an IO loan + offset account for your PPOR - nothing stopping you there.

    An independent mortgage broker will be able to help you find the most suitable product (I recommend an investment savvy broker - even if this is a PPOR, you want to make sure the loan product is suitable for what you are trying to achieve long term).
     
    Simon Hampel, 6th May, 2008
    #92
  13. Lam Thieu

    Lam Thieu Well-Known Member

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    Thanks, I guess i'll be going with one of the big banks and their package deals with interest-only and offset. Not sure which one yet.
     
    Lam Thieu, 6th May, 2008
    #93
  14. Lam Thieu

    Lam Thieu Well-Known Member

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    Do you guys think I could claim FHOG, off a transfered property (related party) with no formal contract of sale?
     
    Lam Thieu, 6th May, 2008
    #94
  15. BillV

    BillV Well-Known Member

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    Yes you kick the tenant out and you move in for 6 months or so
    Then find a reason to move out (you need to have a reason just in case you get challenged ( it will probably never happen but you never know)
    A good reason is: I couldn't afford the repayments.
    You then move out and make it an IP.
    You will get CGT exemption for 6 years but you can't claim this on 2 properties
    so if in 12 months time you buy another property it will have to be an IP
    or you can choose which 1 of the 2 will get the remaining of the exemption.

    Anyway, It seems to me that we are wasting our time here and you are going to do as you are told by mum+dad which is fine as well but at least try to make them see the light.... :)
    You don't have a financial advisor, you don't have a solicitor, you don't have an accountant?
    If you don't have professionals on your side and your folks are from the old school you are gone mate.
     
    Last edited by a moderator: 6th May, 2008
    BillV, 6th May, 2008
    #95
  16. Lam Thieu

    Lam Thieu Well-Known Member

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    I'm trying to work through the options. I'm grateful for your assistance and trying to put the things together.

    I will be seeing a financial advisor on Thursday to talk through some of the concepts which you guys have raised her.

    My parents are weary of paying unnecessary tax, hence their rationale. And yes, they're from the old school way of thinking.LOL
     
    Lam Thieu, 6th May, 2008
    #96
  17. DaveA__

    DaveA__ Well-Known Member

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    paying less tax goes hand in hand with paying professionals to structure it that way...
     
    DaveA__, 6th May, 2008
    #97
  18. stornoway

    stornoway New Member

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    bump.

    just wondering what everyone else's thoughts are about the new deal that aussie are offering at the moment? it seems pretty good to me but i haven't had any dealings with them before so don't know what they're like to work with. it looks like the offer only lasts until the end of the month, i'm not sure if it's only open to people who have loans though. any experiences welcomed!
     
    stornoway, 16th Sep, 2008
    #98
  19. crc_error

    crc_error The Rule of 72

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    Whats the point of living in a property for 12 months to claim it as PPOR?

    I see it as follows:

    12 months lost rent = $13,000
    12 months lost deduction on deprecation = $2000 refund
    12 months lost interest deductions = $3000 refund

    Total lost money =$18,000

    Say you sell in 5 years time, property goes up $115,000.

    Tax @ 15% = $17250.

    So essentially your in a similar situation regardless if you claim PPOR in live in it for 12 months, and then rent, or rent immediately.

    Should you never sell the property, you will never pay the tax anyway..but get the deductions right from the start.

    The other issue is, sometimes you need the rent to help get the loan approved... so making it a PPOR, you may run into loan serviceability issues.

    The way I see it, your getting deductions of 30% when your renting it out, but will pay 15% when you sell on capital gains.. seems to be a good deal to me..
     
    crc_error, 16th Sep, 2008
    #99
  20. Simon Hampel

    Simon Hampel Founder Staff Member

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    You didn't take the FHOG into account.
     
    Simon Hampel, 16th Sep, 2008
    #100
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