PPOR into IP - tax considerations?

Hi

A question for those knowledgeable on property tax implications....

I have a PPOR (let's call this PPOR1) and intend on moving into another, newly purchased, property (PPOR2) and switching PPOR1 into an IP.

I purchased PPOR1 on IO loan and "effectively" paid off the loan but the balance was put into an offset account not paid into the mortgage directly, hence leaving the loan untouched at the original amount. I have used this offset capital for PPOR2 purchase.

When I move into PPOR2, can I still nominate PPOR1 (now an IP) as my PPOR for tax purposes and take advantage of the 6 year absence from PPOR rule? The reason I would prefer to do this is to minimise any future capital gain liability on PPOR1 (that's where the gains have been made).

I have no intention of selling PPOR1 in the near future, but still would like know capital gains tax is minimised if I were to sell PPOR1.

Thank you

RNM

 

Yes

 

Thanks Terry. I assume even though I nominate PPOR1 as my PPOR for tax purposes while living in PPOR2 that during the 6 year absence period, as long as I am receiving rental income from PPOR1 as an IP, I am liable for land tax on PPOR1?

 

What about the CGT on PPOR2?

 

This will depend on the state and the value of the property.

 

This can be minimised by 3rd element cost base expenses or eliminated if this is the main residence at death.

 

The advice i give to clients is that BOTH props meet the test of a main residence. One could use the absence rule. There are options. s118.192 may apply. The 6 mths overlap could apply. Usually when the first prop sells you choose the best outcome. Bear in mind a few limits. 1. You cant use a residence exemption unless you lived there from a point in time and 2. You can claim the same day twice other than the 6 mth rule

 

Good point. As both properties are in NSW and exceed the tax free threshold for land tax, I understand PPOR1 would be subject to land tax (despite potentially being the PPOR for tax purposes for up to 6 years).

As I will opt for PPOR1 as my PPOR for tax purposes (up to 6 years), I assume I would be liable for CGT on PPOR2 if I were to sell. I don't have any intention to sell either property, but just checking tax positions for worst case scenario.

 

Thank for your comment, Paul. Just to be clear, I was not querying about the 6 month rule where one buys then sells PPOR. I am planning to hold PPOR1 and using the 6 YEAR absence rule and having PPOR1 as my PPOR for tax purposes for up to 6 years (while living in new PPOR2).

 

If your not planning to sell, whats the point of using the 6 year rule? PPOR2 has CGT, and the only way to offset it as Terry says would be to make sure you die while living in PPOR2.

 

PPOR1 has experienced significant gains, while PPOR2 was recently purchased, hence no gains. Whilst I am not planning to sell either (in which case CGT concerns shouldn't matter), I am also aware that for a variety of reasons plans can change (so would prefer to minimise any potential CGT)

 

What is the loan situation? What LVR will you have against PPOR1 and PPOR2?

 

PPOR1 @ 40% LVR, PPOR2 @ 46% LVR.

 

Whats the tax deductibility proportion? If you plan on investing more, for example, this might matter.

 

Good question. PPOR1 is 60% tax deductibility, PPOR2 is 59% deductability. PPOR1 was financed with rolling IO loan with offset account, PPOR2 has capital in offset, though the recent PPOR2 financing was P&I.

I was originally planning to keep PPOR2 as IO, but decided to take advantage of the benefit of the substantial lower interest rate of P&I. As yet, I am still not 100% sure I made the right decision here in choosing P&I over IO for PPOR2. This was a rather hastily made decision, so I am open to changing my financing again in 6 months or so. What do you think of P&I vs IO for PPOR2? I know this is a rather difficult question to ask as there are many other factors to consider, eg, where I see myself living long term, but the truth is I am not sure. I see myself living in PPOR2 for at least 5-7 years, then possibly moving back into PPOR1. But a part of me also thinks I could live in PPOR2 long term (there are various moving parts that would influence my decision on this). This doesn't help answer the question, so I am asking with the limited information you have. Thx

 

Ultimate issue is ONE property can be your main res. Any one day only one property is exempt. Even using the 6 year rule absence rule

 

other than the 6 month rule when a person could have 2!

 

Yes - However once the 6 months is passed then the 6 months is disregarded as if it was never available. Its a very limited use rule with very strict conditions. The main one being that the former home is SOLD within the 6 months.

 

disregarded ???

if the settlement date for disposal of the old property is more than six months after the settlement date for the acquisition of the new property both of the properties will be treated as the main residence for the six months immediately preceding the sale of the old dwelling.

so a partial exemption will apply.

 

Brain fade - Loooong weekend... Spot on. Subject of course to the tests for 3 and 12 months and non-income production etc.... Often disregarded key elements esp when people mention subdiv land, building a duplex or villas etc