Turning current Residence into Investment property

Welcome to the forum Megsy35

No !
You stated you have a small mortgage against this property. If you rent out the property you most likely will earn more than the expenses incurred. So it will be positively geared.
see
https://www.propertyinvesting.com/forums/property-investing/help-needed/4332876?highlight=purpose%2Ctest
https://www.propertyinvesting.com/forums/property-investing/help-needed/4332839?highlight=purpose%2Ctest
https://www.propertyinvesting.com/forums/property-investing/help-needed/4332793?highlight=purpose%2Ctest
https://www.propertyinvesting.com/forums/getting-technical/finance/4332366?highlight=purpose%2Ctest
look for the term purpose test

It really depends on your goals.
 If you wish to negative gear
 it makes sense to have the higher mortgage in the investment property and have the lowest possible mortgage in the main residence you live in as it is not tax deductible for expenses incurred.
This means selling the city property and putting the proceeds into the country property and then borrowing through a line of credit loan against the country property for the deposit for the investment loan for a new investment property.
Then you can claim the LOC and new investment mortgage as investment expenses. While the main residence is not tax deductible but you have reduced the mortgage amount while maximizing equity.

If you wanted to positive gear property
 you would rent out the old property with the low mortgage and pay it off ASAP and then buy another investment property and pay it off ASAP.

I have mentioned this quote again as this is a common mistake made by new investors that the ATO looks for (AUDIT target)
You can't borrow money on your old house to buy a replacement new house and then claim the new loan against the old house rental property. It fails the purpose test and will result in a chat with the Australian Tax Office if you try and claim this way.

P.S
You might want to search the forum for
negative gearing
as with the new tax cuts negative gearing may not be the best option for investing and by
reading a few of the previous posting you will know the pros and cons
of this method of
investing.

Hi duckster,

I have a similar question. My situation is:

– Have a PPR (let's call it P1) almost paid off
– Have a IP (let's call it P2), negative geared before

I moved into my P2 from P1 in the end of last year, so now P2 becomes my PPR. I haven't done the FY09-10 tax return yet, so this has not been triggered in my tax return with ATO.

P1 has been rented out privatly, I manage it myself since I moved out. I wish to withdraw some some equity out of P1 in the future, maybe to buy a P3 or maybe lend/gift the money to my family member.

My questions is, if I withdraw the equity in P1 and gift it to my family member, does ATO have any rules about it? After I withdraw the equity, P1 will be neutral geared, will that attract audit from ATO? Will I need to document it somehow to show them where my equity goes to?

And anything else I should watch out that I shouldn't do?

Thanks a lot for your help!

Eventually your tax return will be done and the rental income you were claiming on P2 will cease and the ATO may think you have sold this property and will look closer at your tax return to see if this is the case as they like CGT and will most likely notice you are claiming rent for P! as income instead.

P1 has been rented out privately, I manage it myself since I moved out. I wish to withdraw some some equity out of P1 in the future, maybe to buy a P3 or maybe lend/gift the money to my family member.

My questions is, if I withdraw the equity in P1 and gift it to my family member, does ATO have any rules about it? After I withdraw the equity, P1 will be neutral geared, will that attract audit from ATO? Will I need to document it somehow to show them where my equity goes to?

You may need to show purpose of the loan was for investment purposes to be able to claim the interest costs against P3.

If you gift the money it is not investment purpose there has to be a direct link with earning income to claim interest costs.

If you set up a line of credit loan facility against p1 you can borrow the money from the LOC and use it as a deposit for P3.

The line of credit separates the existing loan of p1 that is very low from a larger LOC loan secured against p1 that is claimable against p3 income as it would be used for a deposit on that investment property p3.

something else do not try to claim repairs that improve a property beyond the condition you purchased it at. As it is claimed via depreciation as an improvement. Replacing something in its entirety like whole roof is an improvement also rather than a repair.

I have one more question that I forgot to mention.

What if I move out of P1 in FY09-10, rent it out, then withdraw the equity in P1 to pay down P2 in FY10-11. Will that fail the purpose test again?

cheers

If you are trying to claim the expense of the increased loan on p1 that has been used to pay down a private use loan being p2 this fails the direct loan to investment purpose.