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Transforming a PPOR in an IP and Vice Versa

Discussion in 'Real Estate' started by Chris C, 8th Apr, 2008.

  1. Chris C

    Chris C Well-Known Member

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    I was just wondering what implications are there for buying a PPOR with your FHOG and then turning it into a IP after 6 - 12 months? What happens with CGT etc?

    Also what implications are there for turning an IP into a PPOR?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    This happened to us - bought a house to live in, then got head-hunted and moved interstate 9 months later.

    If you don't move into another PPOR (ie you go back to renting), you can keep the property for an additional 6 years CGT free.

    Otherwise, you need to make a note of the date at which the property becomes available for rent - and all calculations for income/expenses/tax/etc will start from that date.

    As soon as the property ceases to be your PPOR (either when you buy a new PPOR, or the 6 years from the time it became available for rent is up), you should have the property valued - since this will then form the cost-base for your property for future CGT calculations.

    Of course - you should check your plans with your accountant/tax advisor to make sure you're on the right track!
     
  3. Chris C

    Chris C Well-Known Member

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    This is a total "What If" sort of question, but is it possible, to buy an IP for say $200,000. Hold it and just run it as an IP for 20 years assuming that the place appreciates at say 8%pa for those 20 years that would make the place worth say a little over $900,000 i 20 years time. What is stopping you from then selling the property for $200,000 to one of your children or something and them living in it as a PPOR then selling it in a couple of years time?

    I suppose a more sensible question is, is there any CGT on inheritance?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The ATO will consider this to be a non-arms-length transaction, and as such will consider that you sold it at market value (as determined by them) and will charge you CGT as if you had sold for that amount.

    Not sure about the inheritance side of things.

    What exactly are you trying to achieve ? There are vehicles such as trusts which can help with estate planning and tax management.
     
  5. Chris C

    Chris C Well-Known Member

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    I was just sitting here thinking to myself how awesome it would be if I had parents that were in a financial position where they could give me a head start, and I just figured that if I was to go down the road of property investing it'd be nice to be able to pass on a nice IP to a son or daughter to begin their own investing as well as keep the property in the family and avoid CGT.

    I was actually down the coast two weeks ago chatting with a good mate of mine who comes from a fairly well off family. His father runs his own law firm and they have lots of different IPs and investments etc. Anyway my mate still lives at home (because he is still studying), which is in one of Brisbane Premier suburbs, and his family's home is amazing, they have done so much to it.

    Anyway he mentioned to me that one of his older brothers who is an investment banker is planning to buy their family home off his parents as they start to wind down for retirement, so that they can keep the home in the family and so his brother can raise his family in it. I just think that is really awesome! and I'd love to be able to do something similar with my children.

    Plus it just seems, at least in the current economic climate, that getting you foot in the door is hard, and then it requires another couple of years of hard slogging to even start seeing good returns, but once you can get past that barrier it is easier sailing. I think it was well put in this post:

    http://www.invested.com.au/2/young-investors-30-thread-22735/index8.html#post58989
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The first thing to understand is that "passing on" any asset will incur a CGT event - even if it is to family.

    Keeping it in the family is a good idea - the longer you can hold an asset, the better.

    Discretionary Trusts are useful tools - they allow you to hold an asset for 80 years (I think) and distribute the proceeds from that asset to whoever your trust deed allows. If you use a corporate trustee, you can pass control of the trust to other people (eg your children) in the future by way of assigning them directorship of the corporate trustee company (or giving them the shares and the rights to control the company and trust) etc.

    If you hold assets in your own name, you can use a testamentary trust in your will to hold the asset for your beneficiaries without needing to transfer ownership.

    There's a lot of completely valid stuff you can do that does not involve fiddling around with FHOGs and such.

    I'd suggest a discretionary trust is a worthwhile exercise initially (for any IPs you buy - with PPOR held in own name for CGT exemption), then when your children are old enough to buy their own place - they can buy a PPOR with the FHOG and still get the benefit from any IPs you hold in your trust. If you ever move out of your PPOR but keep it as an IP, you can always sell it to your trust (stamp duty on the sale being the cost) so that it gains asset protection and tax planning abilities.

    Naturally, these are complex topics - this isn't meant as advice - just some ideas to ponder and do more research on and discuss with your advisors.

    A trust is expensive if you only intend to buy one or two properties ... but if you plan on buying as much as you can over the next 40+ years, then a trust becomes a very valuable tool compared to the cost of maintaining it.
     
  7. Chris C

    Chris C Well-Known Member

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    Thanks Sim! I'll definitely mention it to my accountant next time I see him to see what he thinks.