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Investment property into primary residence in NSW

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PeterC | 06 Aug 2013, 06:09 PM Agree 0
I am looking at purchasing a new property and I am wondering if there is a worthwhile
advantage in turning it into a rental property for 12 months, before turning it into our primary residence and selling our existing home. I would be borrowing the total amount to purchase the property (approx 750k) and using funds solely from existing rental property to pay the mortgage. I invisage the rental return on the property would be around the 475/week.
I could use a little advice on this one.
Thanks for the help in advance
  • Eos Property | 08 Aug 2013, 10:30 AM Agree 0
    12 months is a relatively short time frame in the life of any property so any advantages/disadvantages you get will be negligible.

    During the period your new property is an investment property you will be able to claim all expenses - at the same time you will need to declare the rental income in your annual tax return.
    Any increases in value during the 12 month period may be subject to CGT - you can only have one PPOR at a time but it may be possible to make the new property your PPOR and move CGT liabilities across to your existing home for the 12 months you own both properties.
    $475/week on a mortgage of $750K will mean you are heavily negatively geared in the 12 months. Make sure you are in position to sustain this obligation during the 12 months of dual property ownership.
    Is there are particular reason you want to buy the next property now?
  • PeterC | 09 Aug 2013, 10:15 PM Agree 0
    Covering the mortgage repayments is not an issue as I will be using a percentage return from some units we own to pay the repayments on the loan. I am looking primarily to upgrade our primary place of residence for the future, while the market is a buyers paradise, but I am not ready to sell our existing home right now. My thoughts were to buy a property we realy like and ticks all the boxes now at the right price, in a bit of a buyers market, plowing some of our return from our existing rentals into paying off a mortgage on another "rental" for around 12 months and get a bit of a tax deduction while we get our existing home ready to sell.
    Its possible I might be just a little mad thinking of doing this but if the tax advantages are there to be leagaly claimed, I just think why not.
    Do you believe the financial advantage would make it a worthwhile exercise your thoughts are greatly appreciated.
  • Eos Property | 10 Aug 2013, 07:47 PM Agree 0
    Hi Peter,

    REALLY rough maths here.

    Deductible expenses will approximately be - interest $41K (at 5.5% interest rate) and I have allowed $7.5K for rates, insurance, repairs, management fees giving total costs/deductions of $48.5K

    Your declarable income will be $24.7K giving a total deduction of $23.8K.

    Ownership ratios and respective income levels will determine what your refund will be.

    As a strategy not a lot wrong with it.

    PS If there is ANY chance you end up retaining your existing home as an IP then I recommend you convert current loan to interest only linked to an offset account.
  • PeterC | 11 Aug 2013, 06:21 AM Agree 0
    Thanks for that, based on your really rough maths that would give me a large percentage of my stamp duty that I will pay back, so as I originally thought its not a bad idea. We are very fortunate that we can
    financialy do this and as mentioned before it gives us the ability to buy well now before the market starts to move too strongly in a positive direction, while at the same time getting our existing house ready to sell. We will be able to take advantage of what I hope will be a growing market by the time we sell our existing home in around 12 months time.
    Thanks again Peter.
  • Eos Property | 11 Aug 2013, 11:10 AM Agree 0
    Hi Peter,

    Don't forget you won't get all of the $23.8K back and stamp duty is not a claimable expense. It is considered a capital cost and can be used to reduce future capital gains liabilities.

    N.B. The $23.8K excluded any allowance for depreciation, borrowing costs etc.

    For example if your income exceeds $180K you'll get approximately 45% back - if your income is less than this your refunded amount scales downwards too. It all depends on your taxable income.

    You will also need to consider your shared ownership (typically 50/50) which will see part of the claim apportioned between you and your partner.
  • Berbero | 27 May 2014, 03:18 PM Agree 0
    I am responding a little late to this thread, but other people may benefit from all these posts.
    Peter, what about if you buy land and your build your dream home on it, you will then avoid the stamp duty, get $5000 extra from the government tax free and claim 100% of both fittings (7 years, higher return in the first year) and building (40 years) depreciations. You rent it out for 1 to 2 years to claim the most you can and then move in.
    You can do similar with an old house that you can demolish and rebuild.
  • Tom | 14 Jun 2014, 04:53 PM Agree 0
    Peter, all the comments above make sense in that you should rent it and claim all the tax deductions (interest, rates, depreciation, etc) you can. The capital gains tax you will be required to pay will be negligible and at a 50% discount (assuming you keep the property for at least a year). If you never sell then no capital gains tax will be payable. Making your current PPOR property loan interest free and setting up an offset account is also highly advisable as it will maximise your interest tax deductions in the future.
    Another bit of advice would be to make the loan on your new property interest only and set up an offset account. Then pay additional amounts into your offset account to reduce your interest expense. This will provide you with flexibility in the future if you decide to upgrade again and use the new purchase as an IP. This will allow you to maximise your interest deductions.
  • Peter | 19 Jul 2014, 07:28 PM Agree 0
    Well it's been some time since my original post, almost 12 months now. We purchased a property in October 2013 borrowing 750k to cover the purchase and stamp duty and immediately put tenants in.
    We had planned to have tenants in the property for 12 months then move in ourselves, but our tenants are now moving out after 9 months so it looks like we will be moving in earlier than expected.
    Obviously this is now going to effect our ability to claim deductions on the property but I am wondering if we will still be able to claim some deductions if we move in prior to owning the property for 12 months or does this mean that we will not be able to claim anything at all.
    Any advice is appreciated.
  • Bri | 26 Jul 2014, 11:51 PM Agree 0
    Hi Peter, Absolutely you are able to claim the percentage of time the property was tenanted.
    In the Individual tax return the agents will ask you the number of weeks the property was tenanted and then apportion the rent, rates, fees, charges, depreciated etc
    However as this happened over two financial years you will need to advise them accordingly. (so 2013-2014 financial year will be the total time from ownership to June 30, and then for 2014-2015 financial year will be from 1 July til the tenant vacates the premises - sounding like this is only going to be one month) IN this market it is possibly a good idea to get a real estate agent to value the property prior to you moving in so you are aware of potential capital gains down the track
    Hope this is helpful
  • PeterC | 12 Aug 2014, 05:18 PM Agree 0
    Thanks Bri
    We are planning to be in the house for a very long time and according to our agent there has been a little
    movement in the property value since we purchased it, maybe +10k.
    Will be discussing it with our accountant in the next day or so to fill in the dots.
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