Converting PPOR to IP... issues? mortgage?tax?

Discussion in 'Accounting & Tax' started by fayk, 27th Oct, 2018.

Join Australia's most dynamic and respected property investment community
  1. fayk

    fayk Active Member

    Joined:
    2nd Jun, 2017
    Posts:
    31
    Location:
    Sydney
    Hi all, we bought our first PPOR in Jan 18 and since livinv there. Planning to relocate to another city and rent there. Hence rent out our PPOR exactly after 12 months of residing here.

    Before renting out went will need to finish some undone work (driveway, proper garage) and repair old damaged bath, damaged windows, damaged deck

    1. What is the best timing and way to arrange these repairs so that we can show the costs as tax deductible repair for renting the house. We plan to put in on the rental market in January and move out end of Jan 18.

    2. We are now on 3.70% Onwer occupiers 2 years fixed interest mortgage. Do we need to change it to investment loan when we rent it out? Is this a must?? To be eligible for claiming tax deductible cost associated with renting out? We will not have any other PPOR for a few years?

    3. Any other issues we need to consider when converting PPOR to IP for tax savings? It will be negatively geared if renting out

    Based in a major rural NSW town.
    TIA
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    32,644
    Location:
    Australia wide
    building works are deductible over 40 years so it doesn't really matter when you do these
    fixtures and fittings are only deductible if new when rented out so best to do these once you have moved out.

    deductibility of interest depends on the use of the borrowed funds. it generally doesn't matter what the bank calls a loan. But you would need to consider whether you are contractually bound to notify the bank if you move out, and if you are whether you should tell them or not.

    Consider evidencing the valuation of the property at the time it first becomes income producing and land tax if it will be over the threshold. Also consider whether you could use the spousal transfer strategy before you move out.
    Strategy: 50% Spousal Transfer Strategy to Increase Deductions Strategy: 50% Spousal Transfer Strategy to Increase Deductions
     
    craigc likes this.
  3. fayk

    fayk Active Member

    Joined:
    2nd Jun, 2017
    Posts:
    31
    Location:
    Sydney
    Thanks terry gold information! Ill look into it
     
    Terry_w likes this.
  4. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    15,902
    Location:
    Sydney
    As the larger costs are capital works (Div 43) it wont matter when they are done. Div 40 depreciable items would be best done after moving out (or no depreciation is allowed) but none of those in your description are Div 40. I would get the work done THEN get a QS report and advise the QS of the costs of the building works repairs and new driveway, garage etc
     
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,700
    Location:
    03 9877 3000
    Strictly speaking you should inform the bank of the move and realistically you will when you do actually move, if only to get your mail updated.

    They can't force you to break a fixed rate loan contract, which is what would be required to turn this into an 'investment loan'. You're better off not to do this because you won't get that kind of rate with an investment loan.

    The bank calling a loan a 'home loan' or an 'investment loan' has no effect on the tax treatment of the loan. This is simply a label that the bank gives the product. Tax is determined by how the money is used and the accountants have already covered this. You don't need to change the loan over for it to be (or not to be) tax deductible.

    When the move occurs, update your address with the bank. Don't attempt to change the loan. After the fixed period ends, odds are the bank will change it and charge you more as a result.
     
    fayk likes this.
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    32,644
    Location:
    Australia wide
    On what basis can you say this?
     
  7. craigc

    craigc Well-Known Member

    Joined:
    25th Jun, 2016
    Posts:
    1,114
    Location:
    Melbourne
    Australia post mail forwarding may be cheaper than changing address with bank ;)
    Not advice etc.
     
    Jess Peletier and Terry_w like this.
  8. SoroSoro

    SoroSoro Well-Known Member

    Joined:
    18th Jul, 2016
    Posts:
    111
    Location:
    Brisbane
    I didn't even think of this. Clever.

    I can't believe mail forwarding isn't free, but maybe this is one reason why!
     
    craigc likes this.
  9. fayk

    fayk Active Member

    Joined:
    2nd Jun, 2017
    Posts:
    31
    Location:
    Sydney
    Hi All, we got the local real state agent to inspect our house as we are planning to put it in the rental market in January. They have provided a report and requesting the following repairs to be done prior tenants move in for safety issues
    1. property needs a step put in at the darage door (entry from lounge- safety hazard)
    2. Alfresco deck needs nailing and some wooden post repair (some nails pocking out and some rotthen posts- safety hazard)
    3. Toilet pans replacement (personal choice, not a safety hazard)
    4. fix broken window screen and sliding door screen (must)
    5. Fix garage door (automatic remote not working)- $550 for motor fit out

    we had 2 handymans of their reference to quote the jobs above: altogether it came out to be around $3000

    can we get this done while we are inside house this month and claim in tax returnt next year for cost associated with preparing the hosue for tenancy? because the house will be in the market in early January and we may not be able to get the handymans in in the holiday period. (regional area, difficult to kind a man to work anytime of the year to be honest)
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    32,644
    Location:
    Australia wide
    No
     
  11. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    15,902
    Location:
    Sydney
    These repairs relate to present condition have no nexus to producing income. They are preliminary to income. Even if deferred they wont be deductible. Not unlike a person who buys a property new and seeks to get it tenant ready. Also not deductible even if intent was always to rent the property.

    I just had a client audited because they claimed $1K of repairs in the first year when property was owned. ATO said as much. The repairs clearly related to a bad initial tenant and was fine when reviewed. They were looking at timing and asked about the purchase condition report also. When client said he paid for one they requested a copy.

    The other one they commonly address is a new property and cleaning. Preparing a property for initial rent is not deductible but cleaning between tenancy is.

    Depending on state also consider timing of ceasing to be your home to defer land tax to the ext year if the threshold is a concern. This doesnt mean move out on Dec 22 and then rent it in Jan. It means stay resident until 01 Jan etc then move out.
     
  12. S0805

    S0805 Well-Known Member

    Joined:
    3rd Jul, 2015
    Posts:
    476
    Location:
    VIC
    do you think to avoid being caught by this, one should start reno work (rental ready) as soon as authority for PM for rental is signed. at this way, you can prove the intention was property to be rental.....
     

Are you an Aussie investor? Track all your trades, dividends, portfolio, CGT & more in one place with Sharesight. Ditch your spreadsheet & try the award-winning Australian portfolio tracker and tax reporting tool for FREE today.