PPOR(FHB) to IP - loan, tax deduction & reno

Hello,
First of all, a big thank to all the experts on this forum. I am a newbie and finding this site tremendously informative and helpful. Given the staying-at-home break, I have got the time to binge reading Terryw's strategies and various forum discussions relating to loan structuring, bad debt and good debt, deduction and depreciation. Each topic is real eye-opening!!

I bought my PPOR(FHB) very recently, settlement will be in this week. I have got my loan set as basic loan with unlimited redraw facility - after the binge reading, I understand this isn't the most beneficial option when PPOR turns into IP.

• Property is 3 BR, 530 sqm
• Price 590k
• Home loan approved 470k - P&I 2.65% for 30 years
• Cash on hand 175k

My plan is to hold this property for a while (over 5 years) and use it as leverage for future purchases. To satisfy the FHB, I will live in it for 12 months and rent it out asap. I am fortunate that I can continue to board at my aunt's place. I'm 27, single so I can stay on top of most expenses.

Can I check with the experts here if I have revised my plan correctly:

1. Keep the surplus (57k) after settlement and not move to redraw to maximise the amount of deductible loan later when PPOR -> IP.
2. Change my home loan to include an offset account. I'm with HSBC, offset option comes at 2.80% and $420 annual fee with Platinum credit card (will try to deal the fee down). I will make the minimum payment during 12m, move all extra money to offset and make use to the credit card. From Terry's loan tip, if I keep the 57k in offset account, offset is better. Is this correct?
3. The house was owner-occupied and well-kept, vacant for 6 months but it's still very livable There are few places I want to improve. My understanding is fixtures should be done after I move out. Should I use the fund from offset as the improvement is for investment purposes? Does it make a difference if I keep the current redraw facility and use fund from redraw - I understand this means I re-borrow from the bank?

• • Bathroom: remove bathtub, change to larger shower stand and add a toilet, install exhaust fan and skylight
  • Toilet: exhaust fan & skylights
  • Kitchen: add rangehood
  • Flooring: currently floating floor board, from initial inspection under the house, builder tells me there is hardwood underneath. I plan to change the areas of kitchen & bathroom to tiles to avoid water damage by tenants.
• I also plan to open a new window in one of the bedrooms for better lighting because the current carport has covered all lights to toilet, bathroom and one small BR.

I would love to hear from your expertise if the plan for the loan sounds intact for tax deduction once I lease the property out. The plan for improvement works is still in draft, it's be great if you can point out whether I'm being realistic, or I'm treating it as my home too much.

The average rent in the area is about $340 so I shouldn't go too emotionally attached and spend too much. However, I do want to maximise the depreciation and tax deduction whilst making improvement on the property, and potentially attract better tenants. I hope to put the rental income in offset and eventually use it to buy another IP.

Thanks a ton in advance!

And stay safe, stay active!

KN.D

 

Hi Rolf,

No this is my first, and no other debt.

 

Yes to the first 2 questions. I’ll let others with way more experience than me to comment

 

As a general rule don't pay down debt any quicker than you have to if the property will be a rental. Save the same interest by using an offset instead. And borrow for investment expenses.

If you want to improve the property you should be aware that many improvements will be building works and deductible over 40 years so waiting to do it might not be worth it. Fixtures and fittings can only be depreciated it new when the property is rented so adding these now may mean lost deductions later. You also have factor in enjoyment.

 

Thanks so much for your prompt response Shazz and Terry. The growth of knowledge from this forum for newbies like me is exponential, all comes from your invaluable knowledge sharing.

Do you mean borrow extra? Would you recommend splitting to 2 loans (one with offset and one basic redraw) so that I can redraw money for investment expenses? But I find it's not very helpful as my surplus fund should be parked in offset and let the redraw part with lower interest slide free.

I have plan to invest in some shares, in batches and sum will be under 5k, just starting out, this should come from borrowed money as well right? Can it come from offset account?

Or given the size of the investment, the benefit of tax deduction is minimal - the last can work for me now when the market is volatile, bank releases fund when my property settles so it won't be until next week.

 

Frankly I won't be living in the house day-to-day, so I'll be good to live with current fittings, and this period of time can be difficult to carry out major works.

My understanding is I should leave Div 40 items like rangehood, lights, exhaust fan, skylights and aircon until I move out. Tiling, toilet and shower will be depreciated in 40 years and I can start after lockdown.

Should I engage QS for depreciation estimate now so I'll be on the right track? Having the professionals in early for the specialised tasks can help in long-term.

 

The first thing than seemed apparent is the need for a offset. The $57K is better held in a offset especially while you reside there.
The second is that defects that arise prior ot purchase and while you occupy are not deductible repairs just becase you have tenants. Tenant related defects are deductible repairs. Many of the improvements would add to capital allowances, at best.

Q : Do you know how s118-192 works ? Be careful if the property value falls as this could increase the CGT cost beyonds its actual cost. While there is a 6 yera absence rule it cant be ignored in its entirety.

Frankly I won't be living in the house day-to-day, Will it even be your main residence ? State and Commonwealth laws may affect this.

Have a QS report done later. And advise them of any works you do before its tenanted and its cost. Div 40 isnt available.

 

Thanks Paul. I will lock down to a split of loan, Split A 100k variable 2.8% offset 57K, Split B 370k fixed 2.25% 1 year. Split A offset will have all salary deposited and extra payment. Split B can help me save on interest for first year and not paying down the principal too much. First property and market is uncertain so I better balance out the costs of interest, paying down and saving tax deduction.

So I should make improvements whenever suitable? I thought Div40 may kick in for things like new aircon and rangehood (installed after moving out).

From one of your it's about resetting the costbase from the date of income producing, so I should rely on s118-192 if I was to sell at a loss (loss not exempted because the property was leased out, does it work if I only have 1 property?). The gurus can tell if I'm understanding it correctly.

Certainly, the better plan is to live in for 12 months, and only sell after 5 years or more, and claim the 6 years absence for CGT. Planning to move in as soon as the lockdown finishes and arrange bills to sent there.

 

If you are not going to be living in it day to day then it won't qualify as the main residence or the PPOR.

 

I originally thought as long as I live in it, not rent out, and have my things there, it will be a residence.
Is there a guideline/measurement at State/Fed level to determine the extent of residence?

 

Yes there are guidelines. start off with the dictionary definition of 'main' and 'principal' and 'residence' and 'reside'.

Merely keeping it unrented is not enough

 

Th

Thanks Terry. I think it's the case I need to move in the soonest practicable, after the lockdown is over.

How do you find the loan split between variable with offset and fixed 1 year?

 

For CGT that means moving in at settlement or soon after. Not being able to move in because of a lockdown will not be covered but the ATO might take an flexible interpretation. A few days or months won't really matter in the long run either.

I am not a fan of fixing, but there is a personal choice.

 

Greatly appreciate your feedback Terry, and pardon me for asking foolish questions.

Agree there're pros and cons. I intend to balance out the annual fee of the offset account ($420) by fixing the interest for 1 year, also means paying down the minimal amount in Year 1. I get the gist of your view on paying down the least when it comes to bad debt.
Is my logic correct or I'm being fooled by the interest rate?
Is breakcost the most detrimental risk if anything happens in the coming 12 months?

 

You may not necessarily need an offset. Fixing means you lose some flexibility though and breaking the fixed loan may be needed if you want to change banks or if you decide you do need an offset etc it may still not be a big deal as the break costs could small but keep in mind if a main residence the break costs may not be deductible.

Loan Tip: Not everyone needs an Offset Account Loan Tip: Not everyone needs an Offset Account

 

I admit I binge read your tips during the Easter, and downloaded the book for future reference too, they're treasure! But certainly I am far from understanding the principles fully.

Given that I have extra cash ~57k and possibly savings from my salary and future extra cash, I think I should go with offset and I plan to make it in the smaller Split (100k variable at 2.8%) so my principal is at max whilst I have access to fund for repairs, personal use etc. and not contaminate the loan before it becomes IP.

Fixing is due to the difference in rate, it is only 2.25%, variable with redraw is 2.65% and if I have a redraw it will pretty much act like a fixed one - paying the minimum repayment.