PPR (OO) Or IP First Property?

Discussion in 'Accounting & Tax' started by purkulator, 22nd Jul, 2021.

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  1. purkulator

    purkulator Well-Known Member

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    If there is no budget constraints and circumstances allow you to buy your dream property (1.5m+)and live in it or IP of choice and continue to rent, which would be the better purpose of the first home purchase?
    My long game is likely to buy another PPR after my initial purchase (irrespective of whether it is PPR or IP) as haven’t settled with a family yet.
    Main concern is ‘wasting’ CGT exemption holding IP when I could be living in it to trigger CGT exemption for the following 6 years.
    I am trying to list out the pros and cons and see which ways best. Any other thoughts I may be missing here?

    My considerations is mainly financial in terms of capital growth and tax implications.

    PPR advantages:
    1. Lower interest rates
    2. No CGT on capital gains up to 6 years after living in it and moving out subsequently

    Disadvantages:
    1. If 1.5m+ it means the FHOG and duty concession/exemption no longer applies in the future
    2. Interest and other costs related to holding the property is not deductible

    IP advantages:
    1. Interest and other costs related to holding the property is deductible
    2. FHOG and duty concession/exemption still applicable to eligible future PPR purchases

    IP disadvantages:
    1. CGT applicable but subject to 50% discount on marginal tax rate if holding over 1 year

    Probably worth putting some numbers to the relevant examples to add context. So assume 5% capital growth in first year and holding over 1 year the tax on CGs would be 1.5m x 5% gain x 47% tax x 50% discount=17625 in tax exemption if bought as PPR
    Value of grants are 10k (FHOG new properties under 500k) plus 15k (duty exemption for properties under 500k)=25k
     
    Last edited: 22nd Jul, 2021
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    What quaility of growth asset can you buy for 500 vs 1500 k ?

    ta
    rolf
     
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  3. purkulator

    purkulator Well-Known Member

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    Good point, one would think the higher priced asset would perform better.
    At the same property prices moves in cycles and some fringe suburbs can still have good runs at the right time. Or gentrifying suburbs.
    Also units can perform well sometimes too
    I guess a lot comes down to market timing which is hard to get right, how we structure our purchases is something we can control to minimise tax and incentives
     
  4. Trainee

    Trainee Well-Known Member

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    You sure your ‘dream’ ppor wont change once you have a family?

    Or, if your budget was 3m instead of 1.5, would you still think the 1.5 was your dream home?
     
  5. purkulator

    purkulator Well-Known Member

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    Yeah so that's what I'm alluding to. So at the moment, as far as I'm concerned I'd be quite happy living in a 1.5M PPR. But things change over time and another PPR may be required. I'm just thinking its something I would be happy to call my dream PPR and if it also carries tax advantages along the way, why not? If another 'dream' PPR comes along in the future it can always be changed. But at this snap shot in time these are the options.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    This is a personal choice and no amount of spreadsheets and analysis substitutes for a happy wife and a home... and you havent met her for her opinions yet. The specs for a family home will change with time. eg more family rooms etc but when kids are little you (and she) want to know where they are. As they get older they and you want seperate space and consider noise and other matters. A family esp kids can fill a house that seems large with just 2 people.now and then schools, transport and other factors come into play. Most people can think of their first home/s and what they have now. And these days $1.5m doesnt mean its always a "dream home". In some suburbs that is a dump.

    FHOG and duty concessions...in time will be a trivial element of property value. But f you can get it and it fits the need fine. But most in Sydney accept they wont get it since it only applies to property that they dont want to buy !!

    You can always preserve CGT choices if you can initially live in it then rent it and that fits with most first buyer concessions. However it also comes with a CGT trap. s118.192 resets the costbase to market value in such cases. So acquiistion costs eg duty, legals etc can be lost if you dont think about that.
     
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  7. Terry_w

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

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  8. purkulator

    purkulator Well-Known Member

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    That's true. I think the best I can do is plan based on what I believe is 'ideal' today. Waiting until I get into a relationship may be a long time and even that may not work out anyway. Can't sit on the sidelines forever.

    True, but I was thinking if I was to ever have such a property as part of a portfolio, may as well choose it to be a residence at any point in time and convert to IP, if that option is available and hence the question.

    Not if its over the concession threshold currently at 750k in VIC.

    Thanks Terry. Good tips there
    Regarding 330, are you saying if I buy as IP then convert it to PPOR and back to IP that would mean the purpose of the property is still considered an IP but I can make use of the 6 year exemption rule at the same time (given I don't have a 2nd residence)?
    Also allows me to preserve any concessions and grants for the future also?
    Seems like a good option if it can play out in such a way
     
  9. Terry_w

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

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    purpose is irrelevant. If you move into a property, make it your main residence and then rent it out you could potentially keep it CGT exempt, even if you have a 2nd residence.
     
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  10. purkulator

    purkulator Well-Known Member

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    That sounds like a good way to preserve the stamp duty concessions and FHOG eligibility in the future.
    Is there any time frame I need to wait until I settle the property to convert it from IP to PPOR? Say 6-12 months? Or can it be as soon as a few days?
     
  11. Terry_w

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

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    the property can't be your main residence unless you move in, so the longer you leave it the higher the percentage subject to CGT will be.
     
  12. purkulator

    purkulator Well-Known Member

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    Yeah, I mean move in and become a PPOR -> Is there a time frame that this can be done if its settled as an IP? E.g. few days, months, years?
     
  13. Terry_w

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

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    I am not sure you are grasping the concept.

    If you don't move into a property as soon as practical after settlement the main residence exemption cannot apply from settlement.
     
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  14. purkulator

    purkulator Well-Known Member

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    Yes. I understand that. I am saying if it's settled as IP initially, what are the time restrictions before I can move in to consider the property as a PPOR for exemption? I understand the time between IP to PPOR conversion is not exempt
     
  15. Terry_w

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

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    what does that even mean? settled as an IP?

    If there is a tenant in there you would have to get them to leave and then you could move in. If there is no tenant at settlement then it is not an investment property.
     
  16. purkulator

    purkulator Well-Known Member

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    If you buy a property for intention of it being an investment and you settle it and look for a tenant what do you call it? You're not living in it either
     
  17. Terry_w

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

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    In that case you could call it an investment property. But since you have no tenant you could move in on settlement day and it would be your main residence from then on. If you have settled and can't find a tenant and the decide to move in on day 10 you could call it your main residence from that point. but it might even be the main residence from contract time depending on the circumstances.
     
  18. purkulator

    purkulator Well-Known Member

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    Thanks Terry.

    Given that you can switch the purpose of the purchase, if the individual only owns 1 property and currently renting, I cannot think of a situation where it would not be beneficial to consider the property as a PPOR at any point in time by activating the '6 year rule'. Say if the purchase was as an IP (rented out) then converted to PPOR after moving in and then after a period you moved out again, the subsequent 6 years is still CGT free.
    Say they bought it as an PPOR and moved in then subsequently they moved out to rent again, the subsequent 6 years is CGT free also.
     
  19. Terry_w

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

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    Moving in removes the ability to claim depreciation on plant and equipment once you move out again. So it could lead to less deductions. Especially on a brand new property
     
  20. purkulator

    purkulator Well-Known Member

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    I would think up to 6 years worth of CGT would be more significant than the deductions over that period. Personally I would only buy established properties anyway as depreciation gets added back to the cost base as you sell.