Renting out PPoR for tax advantages?

Hi

New to the forums here... been hovering a while and getting generally confused with all the strategy and terminology, but fancy getting involved anyway!

Please be gentle!

Our PPoR in Perth is worth around $700K, current loan is about $350K, say $1900/month repayments.

Our life savings are currently offset against the mortgage but this doesnt seem very tax efficient to me, especially since my wife earns good money in the top tax bracket.

I've been thinking of renting it out at $550/week and moving to a different suburb where I believe we could rent a place which suits our current lifestyle needs for about the same amount ($550/week).

Furthermore, if we re-mortgage and withdraw our savings for further investment, we could negatively gear our house and hence reduce my wifes tax obligations.

What do people think of this approach? How would I evaluate it logically?

Furthermore, if we were renting our house out and then decided to sell it, would it still be our PPoR and therefore exempt from capital gains? Its our only property at the moment.

Cheers for your input,

Sam

 

Hi There Sam!

I like that you are thinking outside the box, you are already ahead of about 80% of the population.

I am not an accountant so I won't comment on that aspect of your question, but as a long term investor I will say the following. Tax advantage (in my opinion ) should never be the sole reason to do anything. You need to look at the bigger picture. What are your goals? Financially and lifestyle. wHat are you trying to achieve and will renting your house help you get there? Also will you be happy renting? How will you feel about other people living in your house (and not treating they way you might like!!)

Both short term financial goals and long term are important in considering this move. I think you would find more benefit if you rented somewhere cheaper than you can get for your house if your aim is to wipe that mortgage asap. So like I said what are you hoping to achieve and will this path take you there.

Good luck! Keep us posted.

 

Hi Sam

Second what Joan said- it's not always about finances but lifestyle as well. Renting may well suit, but that's up to you guys to sort out.

As far as selling goes, if you secure a second PPOR to live in, the cap gains on the first PPOR/turned IP are worked out on a pro-rata basis so you're best to get a valuation done on the property before turning it into an IP so you're clear on the difference in value when you do go to sell it.

However, as long as you have no other PPOR at the same time (as you're renting instead), your PPOR is exempt from incurring cg tax for up to 6 years after you vacate it and rent it out. This can be a huge bonus, depending on the growth period during that 6 yr period, and save you big dollars in tax.

For further information read here:

Guide to capital gains tax 2007-08

 

Thanks for the responses and answers to my questions... useful.

I think our sole reason for doing this would be to try and re-invest some of our savings and equity which are currently offset against our mortgage, plus reducing tax liabilities if we can. Lifestyle comes into it but to be honest we already live in a high-value prestige area anyway and would just be moving to another. The Mrs is struggling to see the benefit so it might just be too complicated....

In fact, I did some basic sums and realised that if we rented our current PPoR out it wouldn't be negatively geared at all!, oops

Keeping things simple then, what are peoples thoughts as to at what time (financially, i mean) an investment property becomes a realistic proposition? Like, when you have a 10% deposit saved, for example. Are there any rules of thumb?

I would be happy to put $60-$80K of our savings into an investment... its just sat there offset at 4.75% at the moment and it seems like we should be doing something more useful/adventurous with it.

Cheers

 

Hi Sam

It sounds like you've made your mind about moving on regardless. I can't help you with the WA market but there's never really a "right" time to purchase property. I do believe, from what I've read, however, that Perth is certainly in no boom period and now may well be a pertinent time to jump in. Just make sure you conduct your DD, know the market intimately that you're intending to buy into and allow for all costs realistically.

 

Sam

Personally, I can't see a lot of value in renting out a PPOR which is not negatively geared.

I say this because if you'll pay tax on the income and because if you currently have equity in the property you can still aceess it by doing a valuation so you don't have to move out to get your hands on it.

You've also got to consider the damage to your PPOR by tenants
and it's common knowledge that the majority of tenants won't be looking after your place like you are.

If you decide to go ahead, I see a lot of value in getting a written valuation done before renting the place out. You do get the 6 year exemption but if in that time you buy another PPOR you can only claim it against 1 of the 2 properties.

Also, by doing a valuation (From the tax point of view) you are locking in the current property price and if in the future prices come down you have proof that the value was higher when you rented the place out and won't need to pay CGTax. Also, if you do sell the property for a lower price than the valuation price, you should be entitled to carry forward those losses against future capital gains.

 

Thanks for the info guys - We have decided not to rent out our PPoR - We've just finished a 2yr rennovation of the entire house (to our tastes and standards, not renters) and yeah youre right, we would be worried that it would get trashed. And it wouldnt be negatively geared.

We're pursuing the straight IP route... see my other post. Not sure if this is a good time in WA or not but i guess we'll have to figure that one out! Off to do some sums...

Sam

 

Why restrict yourself to WA? Do some reading and you might find some superior places that have been in a downturn for a while and are better placed than WA real estate.

 

Jacque,

Agreed. But just been out on my first trawl around the real estate agents and I feel that since this is our first IP it would be best to learn the ropes on something close to home and relatively low-risk. Still, it does seem like its going to be a struggle to find something that is even close to CF neutral or positive

I have lived in Perth for 3.5 years and even now there are many suburbs that I really hard know well enough to know whether an IP deal would be good or not.

I have a friend who just bought 4 places in Melbourne and is now considering the States... this is waaaaaaay out of my comfort zone - though with regard to the Melbourne places they are CF+ from day one so I can well see the attraction.

Hats off to those with enough balls/money to purchase IP's in faraway areas they know nothing about - I just wouldnt know where to start!

 

Building a team

Hi Samwise,

It is great that you are taking the time and initiative to build your wealth.

But many of us have "lone ranger syndrome"... the inclination to do everything ourselves.

It takes a team to make millionaires. You need to build a wealth team of people who you trust.

Limiting yourself to finding an investment proeprty in your local area could cost you thousands of dollars in opportunity cost over the long term... because where you live simply may not be poised for as high capital growth going forward as property in another location in Australia.

The property partners that I refer my clients to do top-down macroeconomic research to identify areas in Australia that are poised for strong capital growth. Only then will they source properties for clients. The properties they source will likely have strong cash flow (and with current interest rates, after tax, many of them are cash flow positive) and that meet strict criteria. They will negotiate hard and do professional due diligence on a property before sourcing it for a client to make sure it all stacks up.

Sometimes it can be worth paying for professional service!

Having said all this, you always need to do your own due diligence. Because no-one cares about your money as much as you do!

Also, it is important to have a vision and a long-term strategic plan in place to get there. Often, our tendency as humans is to just take the next step (i.e. purchase the next property) without having any sort of end goal in mind. Having a long term strategic plan enables you to make better decisions, it sends a clear message to the people you are dealing with, and it helps you to focus your own energies.

Finally, make sure you are purchasing your investment property in the optimal ownership structure. i.e. ensure that you take asset protection and tax into account.

If you would like to discuss further please private message me.

 

Check PM Michelle, thanks