Tax Tip 358: Tax Issues Investing before Buying a Main Residence

When you invest before you have bought a main residence the issue is that you will have less money for the future main residence, and this means you will end up having to borrow more for the main residence and therefore pay more non-deductible debt.


Example

Bart is investing in property while he lives with parents. He is a good saver and manages to save $100,000 which is used as deposit on a $500,000 property.

He keeps saving while living at home and repeats this 5 times

So, he has 5 investment properties which he paid $2,500,000 for with loans of $2mil. He has tied up $500,000 in these properties.

Then he decides it is time to move out and buy a main residence. He can’t live in any of the properties he bought because they are in areas he doesn’t want to live in.

He goes and borrows to buy a new main residence and needs to borrow an extra $500,000 and pay interest on this which won’t be deductible because it is for their owner occupied property. This will cost an extra $15,000 per year in lost tax deductions.


What could Bart have done?

If only he bought the main residence first, he could have paid deposit and borrowed 80% and then paid the loan down and then debt recycled into the 5 investment properties making things much more tax effective.

Alternatively, he could have borrowed from parents or use a parental guarantee for the first one and borrowed 100% for that and then got the main residence.

The tip here is doing things in the right order allows greater deductions.

 

Slight left of field take on this one,

I'm a defence member so no point buying my own place just yet (10-15 years of postings to go), I think I have overcome this by......

Buying IP as IO, building up the income in offset.

So when it comes time to buy PPR, I can move these offsets from IP into PPR, which means the IO loan is unaffected and interest is claimable against IO PI as normal.

But now the PPR is offset, with lower the non-deductible debt, allowing me to pay down loan and debt recycle to keep investing.

Does that sound reasonable?

 

why no point? You can buy a main residence which later becomes an investment or an investment which later becomes the main residence.

 

ADF also partially fund the choice under some very generous schemes. In the ADF the issue of a change of property use is very common. I see people buy in one city and get posted elsewhere and they retain it and rent it out. Some own 2-4 properties through this. Often through Defence Housing or local agents who actually like ADF tenants. Some of the ADF tenant rent is even partly funded by defence. Its like a ponzi scheme that is a winner for all.

 

The other risk is that by the time Bart wants to buy the PPOR, he doesn't qualify for additional loans? This would have been an issue in the last 5 years.

 

Available locations close to bases are generally not great options, rather restrictive depending on desired investment areas. ie walkable urban areas, with broad spectrum of job options, im off to Gippsland next year for example. Then again maybe I need to do some more game planning on this.

 

Some of them are ok, but some of the 'special loans with benifits' comparable rates are well above market rates with less flexibility.

Owning your own home in location is a cut to allowances due to being your own home.

In saying that, the stamp duty exemptions etc, might actually be a good idea I won't retire there so maybe I build a cashflow style place, live in that and debt recycle on it, capital growth will not be great.

Thanks guys I think I might need to rethink some previous decisions and ideas.

 

There is no need to restrict yourself to near bases.

 

have to live in PPR yes to qualify for all the goodies, sale Gippsland

True, but long travel times are not a lifestyle choice im keen on so kinda doing it to myself

 

We have many defence force clients and some have done it. Personal choice though.