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Renting out PPOR, what do I need to be aware of?

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| 01 Aug 2012, 01:18 AM Agree 0
We're considering renting out our NSW-based PPOR (largely for lifestyle reasons) - but I need some more thoughts/advice on the benefits of doing so.

There's obviously the tax benefits - what else am I missing?

I read that the 6 (?) years you can rent our yr PPOR without attracting CGT is "resettable" but I'd never heard that before. I knew the 6yrs (or is it 7) didn't need to be consecutive, but does it really "reset" if you move back in?

I'm a tad nervous about upping the family (although it's within the same suburb).. I just want to be sure there are clear financial incentives.

(For ref. we have another negatively-geared "accidental IP" which was our 2nd house that we held onto... but it's not showing great returns but I'm loathe to sell it in current market.)
  • Eos Property | 01 Aug 2012, 01:50 AM Agree 0
    Hi Chalky,

    The 6 year rule does reset - check this ATO release to confirm the reset requirements.

    http://www.ato.gov.au/corporate/content.aspx?doc=/content/86191.htm

    I would also consider changing your loan to an interest only option if it is principle and interest. At the same time set yourself up with an offset account and direct all of your excess money into the offset account to reduce your monthly interest bill on the property.

    Doing this helps you retain maximum flexibility of use of your funds if your goals change in the future. For example if you have surplus funds in your loan account and grab them to buy and car, go on a holiday or even but a new house then the deductibility of the redrawn funds no longer exists. In contrast if you have funds in an offset account you can use them as you see fit without any impact on tax deductibility.

    You may also want to explore an interest only option (if you haven't already) for your first property.


  • chalky | 01 Aug 2012, 04:16 AM Agree 0
    Hi Derek. Thanks for your speedy response.. and patience whilst I get my head around this! Ok great news about resetting.

    I'm on IO for my IP but I wasn't sure if it was the right thing to do with PPOR. I thought paying it down fast should remain a focus?

    I'm anticipating friends/family questioning our decision to move out from PPOR so wanting to be sure I've thought it through.

    It certainly reduces our taxable income significantly... however I assume I need to rent for less than this tax saving (approx 30% of deduction/annual IO mortgage repayments) in order to be infront yes? Am I thinking this through properly?
  • Eos Property | 01 Aug 2012, 05:35 AM Agree 0
    Hi Chalky,

    Using I/O with offset on your own home can do a very similar thing to making additional payments on your own home.

    Often people move out of their 'home' and never go back. They can then get caught needing to buy a new home and needing to borrow additional money. These people grab their redraw funds and use the money towards their new home thinking the redraw interest is deductible.

    This is not the case as the purpose of the redraw (to buy a new home) determines the interest on these funds is not deductible.

    I/O and offset allows you to retain maximum flexibility. This is a key weapon in your wealth plans.

    Don't be overly focussed on the tax saving aspect of your decision making process. Even on the highest income tax bracket you will pay out a $ to get 50c back. Seems a little strange doesn't it.

    If your income level is less than your costs then you will have some tax deductions coming to you. Note - when looking at costs you only include interest payment. Any principle payments are not deductible as they are considered a repayment of capital.
  • chalky | 01 Aug 2012, 12:10 PM Agree 0
    Thanks - most helpful. I'll definitely look into IO with offset.

    When you say some people think the redraw interest is deductible, I don't follow what they are thinking. Do you mind explaining that to me? Sorry.. n00b and all!

    If I don't focus on the tax saving as you say, what are the primary financial benefits to be gained from renting out a PPOR. As opposed to staying and switching to I/O w/ offset?

    I'm getting there.. I promise ;)
  • Eos Property | 02 Aug 2012, 08:55 AM Agree 0
    Hi Chalky,

    Redraw and deductibility.

    Let's assume you have been paying down your old home, which is now an investment property, and you have $100K redraw available to you. In other words you are ahead of your repayment schedule by $100K.

    You grab the $100K and use it as a deposit on your dream home up the coast and borrow the rest of the money. Some people think, because the $100K is secured by your investment property it is fully deductible.

    This is not the case because the ATO will use the 'purpose of the borrowings' to determine whether or not interest on a loan is deductible. In this case the $100K was used to buy a new home so the interest incurred is not deductible.

    Hope that helps.

    I don't know enough about your situation and goals to understand what you are trying to achieve. Reading your post it would appear as if 'cashflow' may be an issue and that is why you are focussing on tax savings.

    Sure tax is part of the picture - it is not the whole picture. I have seen some people make some, what I consider to be, really silly investment decisions because they wanted to save tax. Property is more about wealth creation and if you can get some tax deductions along the way then that is a bonus - it should not be a reason for investing.

    If this is the case you may also want to consider an PAYG tax variation which is a forward estimation of your tax position. Check out http://www.ato.gov.au/content/00188348.htm for more details.

    If your property/ies is/are relatively young you may also want to investigate getting a depreciation report done.

    Hope this helps.
  • chalky | 02 Aug 2012, 11:42 PM Agree 0
    Ok I'm on the same page now!

    Not too fussed about tax deductions. We run our own company so have a good structure that helps in that dept. I somewhat foolishly just thought that was the main reason people rented out their PPOR.

    I'm "one of those people" that got into property early but based my purchases on where I wanted to live. I bought my first unit at age 21 in Sydney's Redfern, the 2nd house at 26 with my husband, and 3rd property at 28. All to live in at the time. We sold the unit (purchased with a friend so it was just the way it worked out). The 2nd house is returning 7% but very little CG in 6 years.

    So I'm late to the game but I've long loved property and think I need to get a bit more serious and educate myself.

    So right now the strategy is to buy the next property using the equity in our IP and go for CG.

    Can you recommend any books or resources that you think would be helpful. Thanks again for sharing your wisdom.
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