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Strategy: Buy a second PPOR and Later Sell it

Discussion in 'General Property Chat' started by Terry_w, 31st May, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Strategy: Buy a second PPOR and Later Sell it

    Someone may have a long term PPOR and have no intention of ever selling it. But it may still have a large non-deductible loan which will take years to pay off.


    A possible way to help pay this loan off sooner would be to buy another property, get some negative gearing benefits perhaps, but the main aim would be to get some capital growth. Once some good growth has been achieved this property could be sold with the proceeds used to pay into the non-deductible loan. Possibly 25% of the gain will be eaten up by CGT but that is still a much lower rate of tax than wage income.


    Where work and lifestyle permits a way to avoid this CGT would be to move into this second property and establish it as the main residence.


    Once the property becomes the main residence it could be moved out of and then the 6 year rule applied. If it is sold within 6 years of moving out it could be totally CGT free.


    Example

    Scoop buys a nice house to live in, but he has a $700,000 loan on this. He estimates it will take him about 10 years to pay this off. His job sends him to Canberra for 1 year on a temporary transfer so he has the opportunity to consider using this strategy.


    He decides to buy a $500,000 property, move in and hope for the best. If it doesn’t work out he will just keep the property as a rental once he returns to the original PPOR.


    After a year, Scoop moves back to Sydney and keeps the property rented. At the 5.5 year mark after moving back he decides to look at the situation and make a decision on selling or not.


    The Canberra property is now worth $1,000,000. The cost base is $550,000 so there will be a capital gain of $450,000. 50% discount means this will be $225,000 so potentially $110,000 tax if sold.


    Scoop has to think about the Sydney property too. Even though he is not selling it, if he counts the Canberra one as the main residence he cannot claim the Sydney one as the main residence for the same period. His Sydney one was worth $1,000,000 when it was first rented out when Scoop moved to ACT. That will be the new cost base. It was purchased for $800,000 so that means it will have a higher cost base and more CGT when sold.


    But because it cannot be counted as the main residence while the ACT one is counted there is also the time factor to take into account. The time period it was not the main residence will be subject to CGT. This is worked out using a formula:

    (time not the main residence/total ownership period).


    The way the CGT works in this situation is that a higher percentage of the property will be subject to CGT in the early years and this will reduce as the number of years owned increases. So the CGT effect decreases over time.


    If the Sydney property was sold 7 years after Scoop moved back into it then he cannot claim at as the main residence for 6 of these years because he was claiming the other property. So 6/7th (or 85%) of the property will be subject to CGT.


    If the Sydney property was sold 27 years after moving back into it then 6/27ths of the property will be subject to CGT =just 22%


    You may think this is a lot, but the 50% CGT discount is then applied and also other costs associated with the property but not otherwise claimed can be used to reduce the capital gain even further (if purchased after Aug 1991). This includes interest and rates while living there. See Tax Tip 86: Don’t be so fearful of generating income from the main residence


    In addition, if the property is the main residence at the date of death then it will be exempt from CGT (while you were alive) for the persons you leave it to.


    So this could be an effective strategy to pay off the home loan sooner with minimal tax consequences.


    Another strategy worth considering is selling the main residence CGT free and moving into an investment property.


    See also my related tax tips;

    Tax Tip 86: Don’t be so fearful of generating income from the main residence

    Tax Tip 86: Don’t be so fearful of generating income from the main residence



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

    Tax Tip 23: The 6 year Absent from Main Residence Rule
     
    C-mac, r3ckless, bez23 and 6 others like this.
  2. Newfast

    Newfast Well-Known Member

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    Hi, @Terry_w , thx for sharing it. I love IP's.

    Me and my wife would like to buy a property with smsf. Could i please ask how much loan we can get if we have 100K $ together and how much is the cost from setting up smsf to the final settlement?

    Thanks
    Nav
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I can't answer that question other than with 'it depends'.
     
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  4. Observer

    Observer Well-Known Member

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    @Terry_w should the property be rented to be able to apply for 6 year rule? E.g. if I bought a property as a PPOR and decided to sell in 5 years (with the property still being PPOR at the time of sale, never ever rented) would I qualify for this rule?
     
    Last edited: 1st Jun, 2016
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    6 year rule applies if the property is not rented too - if fact the 6 years doesn't start until it is rented.
     
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  6. Marg4000

    Marg4000 Well-Known Member

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    Works even better if the first PPOR was bought prior to 1985!!
    Marg
     
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  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    that was 31 years ago now.

    not many of these around - but I have a client with 5.
     
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  8. Marg4000

    Marg4000 Well-Known Member

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    Bought our PPOR in 1979!

    Still have quite a few neighbours who were here before us.
    Marg
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Great - are you still living there?
     
  10. S0805

    S0805 Well-Known Member

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    Terry, so does that mean because scoop bought these properties as PPOR he has 6 yrs from the time Canberra property become rented to sell to sell that CGT free by claiming main residence exemption. But he has to pay CGT for same 6 yrs for sydney property...is that right?

    I am keep getting confused about 6 months/6 year rule. My understanding was one can claim PPOR exemption on two properties overlapping 6 months. I guess if its more than 6 months then one of the property will be up for portion of cgt....
     
  11. Bran

    Bran Well-Known Member

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    Terry, I lost myself in that post.

    How about my situation...

    Bought a PPOR in 2009, 480k, moved in immediately.
    Moved out 2 years later, interstate, then overseas, rented out immediately
    Moved back for 1 year
    Bought a new PPOR - 700k, moved out of the other

    Now, first PPOR 680k (say), and new PPOR 800k (say).

    If I sell PPOR 1, whats the deal?
    But then, it's 90% TIC in my wifes name, earns nothing...
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    6 Month rule can only apply in limited circumstances - won't work here. First one would need to be sold within 6 months of buying the second.

    He could sell Canberra CGT free. But Sydney would be subject to CGT unless he died in it.
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like, if I understand correctly, PPOR 1 could be sold tax free.
    But PPOR would be subject to CGT.

    Work out if there would be any tax payable on PPOR1 as if none or not much it may be more worthwhile to claim the exemption on PPOR2
     
  14. Marg4000

    Marg4000 Well-Known Member

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    Yes, still here!
    Marg
     
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  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Are you using the 6 year rule on any other properties/?
     
  16. Marg4000

    Marg4000 Well-Known Member

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    No. But we are aware of the possibility.
    Marg
     
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  17. Andrew H

    Andrew H Well-Known Member

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    Hi @Terry_w great post! I have thought of selling our PPOR to reduce debt on our new PPOR.

    in my situation:
    bought PPOR 1 in 2009
    bought PPOR 2 in 2015 moved in, rented PPOR 1 immediately.

    so on 5.5yrs from renting PPOR 1 we could look at selling this asset CGT free? we are not planning on selling PPOR 2 for a very long time so with your strategy would this be a possiblily of gaining more cash CGT free?
    cheers in advance.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes that PPOR1 could be sold CGT free depending on the circumstances.

    If you wish to 'keep' it you could look at selling it to a related entity.
     
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  19. Observer

    Observer Well-Known Member

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    @Terry_w what are the benefits of selling to a related entity in this scenario?
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depending on the circumstances, You can get to gear up again and have the interest deductible - and keep the property.