Renting our home

Hi there

Which state is the property located in?

Hi Pvasi,

You have a couple of options available to you and it is difficult to give some definitive and constructive feedback without more detail. I'll throw a few options at you to get your mind started.

1. Sell old PPOR and use funds to reduce mortgage on your new home. Then leverage off increased equity in your new home to re-start your investment journey.

2. Use rental income of $400/week to reduce your PPOR mortgage. Not sure how much of an effect $400/week will have on your new mortgage. Combine this with your desire to leverage off your old PPOR to start your investment journey.

Suggest you do some maths with these two options on the table to see which one suits you best. You'll also need to consider your income level, spare cash levels and so on before formulating a strategy moving forwards from here.

Anecdotal comment from the weekend press reports suggest the investor market in Perth has really picked up in recent months with instances of multiple offers being reported. Deppro also recently reported a 30% increase in investor activity in Perth in January 2013 when compared to January 2012.

I suspect both of your properties are located in the SW area – if this is the case you may wish to diversify into the Perth metro areas so you are exposed to a wider (some would say more stable market). I am not sure having all of your property eggs in the SW market is a good idea. When the SW goes well it goes well – when it doesn't it certainly doesn't.

Hi Peter,

Certainly the additional income from your old PPOR will add to your taxable income so you will need to factor that into calculations.

How old is your old PPOR? Getting a depreciation report done may be to your advantage in terms of tax minimisation as this can be used to reduce (on paper) your net profits. There are depreciation companies that travel to the south west and will undertake a depreciation report on your property. 

Speak to your accountant about establishing a new base/cost price for your old PPOR. Now that it has become an IP you will be liable for CGT from here onwards. A formal valuation, for tax purposes, will be required at some stage,

Your original post asked if it would be worth borrowing again for another investment – ostensibly to save tax.

Certainly this is a strategy you can employ but negative gearing is more effective at the higher income levels. Your taxable income level will determine whether or not negative gearing is valid, or not. Having said that as a property investor you need to be making money so don;t be overly focussed on tax saving – rather look to make profitable property decisions. This can be achieved through capital growth or cashflow or, if you hit the sweet spot, a combination of both.

Which SW town are you in? I assume you are more in the Bunbury area.

I know Deppro do head down south from time to time and are due in (Mount Barker, Albany & Denmark) in the next few weeks. Give them a call on 61026920. Ask for Claire.

Your old PPOR will start incurring CGT liabilities as soon as you move into your new PPOR apart from a brief period (about 6 months from memory) when you may be trying to sell it after moving into your new PPOR.

Now it may be possible to delay declaring your new PPOR as your new home but that would depend on advice from your accountant and the general market at the time.

The 6 year rule only applies when you have one PPOR.

Hi Brian,

The ATO does not look at the security attached to a loan when determining whether or not the interest is deductible. Their primary consideration is the purpose of the borrowings.

If I read your comments correctly you are suggesting Peter redraw from his old PPOR (now IP) loan to pay down his new PPOR to make the redraw loan deductible.

If this is correct the redraw is NOT deductible as the funds have been used to pay down the new home (the purpose test).

Cheers

There is no tax advantage in doing this.

@pvasi

I thought I'd quote from Noel Whittaker's Making Money Made Simple in order to answer your question:

"The best course is to sell the old house, use proceeds to help buy the new house and then borrow against it to buy the investment property. This enables the rents to be offset against the interest."

Hi Peter,

The key point from Terry's link is that you can only have one PPOR at a time. Certainly the legislation allows "(4)  If you make the choice, you cannot treat any other * dwelling as your main residence while you apply this section, except if section 118-140 (about changing main residences) applies." you to maintain your original property with CGT free status but you cannot also, at the same time have CGT free status on your new place.

Hence why I suggested you speak to an accountant about which property is best being declared as your PPOR.

Cheers