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You friend can still claim the 1st property if he wishes as PPOR (6 year rule) even if he rents out and negative gears whilst living in the 2nd one. As long as the rent is market rate,all expenses in holding that property are allowable. if loan redrawn or increased for for 2nd property then it needs to be apportioned appropriately . When he disposes of 1st property , see his accountant, and it should be CGT free. Unfortunately you can only claim 1 PPOR at a time so your friend will have to take this into calculations if he is thinking of ever disposing of the 2nd property. so for the period he cllaims 1st as PPOR whilst rented out will be taken of PPOR on sale of 2nd and CGT subject then.
Alternatively your friend can negative gear 1st property as above and when he sells then the capital gain calculation will be apportioned basically as follows:- length of time rented/length of time owned will give the percentage of profit (after all addbacks and deductions) onthe transaction that is subject to CGT and pay the appropriate amount when due. it may be more benefical that way.
Your friend will have to crunch the numbers 1st and make a decision which way he wants to go in regards to PPOR.
"He kept his first home and rented it out when he moved into his new home. He has been negative gearing the first property since moving out" yes he can negative gear this property , the loan does not have to be "for investment at the outset"
Peoples circumsances change as well as their asset position.
Assuming that your friend has not increased the loan from original property to help purchase his new property or anything else, as well as the rent on that property is at "market rates" then the normal investment guidelines apply. As previously mentioned your friend needs to get a schedule done for depreciation, from a quantitative surveyor to maximise his non cash decuctions.your friend cannot claim the interest associated with any loan or loan increase for the new property where he lives as his principle place of residence.
