Best strategy for buying an IP now to convert to PPOR later.

Last year I purchased an IP by using equity from my PPOR .The IP has had a significant amount of growth and am looking at buying my 2nd IP which in 10 years will be our PPOR.Both the current loans are in my name as i am a high income earner.
The 1st IP is positively geared.Plan is to use the maximum equity available to put down as a deposit for the 2nd IP.
The 2nd IP will be in Joint names for tax deduction purposes as my partner is a low income earner and that will not change.This property will be cash flow positive
PPOR loan has an offset account into which all savings are being deposited.

How do i setup my 2nd IP ownership and loan?Plan is in 10 years to pay down the PPOR loan and use the proceeds to pay down the 2nd IP loan.

 

There should be no problem with this.

The equity release can usually be in both names if need be, depending on lender. Then you'd get another loan for the remainder of the IP purchase which would be in both names.

If you've gone direct to bank for your first IP, or even used a broker whose not proficient in investment lending, I'd definitely speak to a broker from these forums to check out your existing structure - you don't want to build on something that's not fully optimal.

 

Is there any way that you can move into the property that will become your PPOR long enough to establish yourselves as "living there" before you make it an IP? This may allow you to take advantage of the "first use" and "6 year" rules which will mean no CGT if/when sold/inherited. This can save $100,000s.

E.g. Property purchased for $1m

Scenario 1: First use IP (income generating), move in 6 years from purchase, value $1.75m, pay full CGT on increase in value from purchase to when move in ($750k x 50% CGT discount x marginal tax rate = +/- $1000,000+++

Scenario 2: First use PPOR (live there long enough to get bills in your name), rent out for up to 6 years, move back in = $0 CGT.

Is this possible? Not financial advice, DYOR. Here's the link to the ATO relevant pages: Treating a dwelling as your main residence after you move out

 

There's also a huge thread on this strategy:

Tax Tip 23: The 6 year Absent from Main Residence Rule

 

@Terry_w and @Paul@PFI can answer this better than I can. From having read their "6 year rule" posts, my understanding is that it reverts to a non-CGT bearing asset once it has become a PPOR, and the CGT applies only to the improved value while it was income generating (assuming it was not first a PPOR before it was an IP). Accept I may have misunderstood the rules.

 

@wylie is correct, if an IP first it will always be pro-rata, ie 6/30th of the period from @wylie example.
You have misunderstood the posts from Terry and Paul.

Also note, if looking at 6 year rule can only have one main residence exemption during this period for the OP. (Noting OP already have a MR).

 

Was talking to my accountant and in case of Joint tenancy,All the expenses are tax deductible based on the % ownership split .Since I will be servicing the loan ,the loan interest is deductible against my income .
Not sure if it is the same in case of capital gains.

 

Can’t do this as I am investing in another area .

 

Joint tenants have no percent ownership unlike tenants in common. But for tax purposes they are treated as being tenants in common in equal shares. so if 2 people are joint tenants they will be considered 50/50 Tenant in common owners.

All expenses will be deductible in this portion. Just because you are servicing the loan doesn't change anything you will also have to deduct this 50/50 too. Same with capital gains when sold. 50% of the gain would be assessed to each of you.

You should seek some legal advice on the benefits on your spouse owning this next property solely

 

Thats correct.I am happy with this arrangement where it is owned by my Spouse and Tax deductions are credited to her name as I am expecting the property to be neutrally geared or marginally cash flow positive.It will surely be if not in the short term.
Works well as far as Capital gains are concerned as now there will be 1 IP property in each of our names.
Just have to confirm how this will affect our serviceability as we are borrowing in both our names.In a couple of years if we are looking to buy another property how will this affect our serviceability or importantly my serviceability.

 

With spouses you generally have the option of going on the loan even if you don't own so this can improve serviceability. But overall as a combined force it generally will only make a marginal different relating to the deductibility of interest and the different incomes on some serviceability calculators.

 

Ok looks like I’ve managed to get somekind of a plan in place.
Both of us will be on the mortgage but only my spouse on the Title.
IP 1 is Neutrally geared and only my name on the title.With me being the High income earner the Interest deductions for the 2nd IP can be claimed equally between us.This Will ensure IP1 is negatively geared and being in the higher income bracket I can get close to half back.
Same time IP2 will be positively geared due to only half the interest income being a deduction.But my missus is in the low income bracket and will pay the lowest rate of tax.
With both of us owning 1 IP property each will help when selling for Capital gains down the line.

 

Only owners can mortgage, so do you mean your spouse will be on the loan?

How you own the 2nd IP won't change anything for the deductibility of expenses for the 1st.

Who will own IP2? You seem to imply you spouse will, but talk about claiming equally