Please forgive my ignorance, as this has probably been answered previously, but there are so many forums and threads … I have just discovered the site.
My husband and I have owned a house for 2 years (and lived in it) and we want to turn it into an investment property. How exactly does one do that? What is the paperwork involved? What are the costs involved?
M
Mini,
Are you leaving the country? Going to live with your parents? Need to let us know this before we can follow up.
Regards the paperwork ? Not really much to do. Just get a licenced valuer to give a price the day you leave, but again depends whether you are going to move back in within 6 years or have another PPOR etc.
Have you a long term plan?
Mini
Also need info on finance situation,
how are your loans structured if you have one.
do you work? Do you pay tax?
IF you have a loan, Are you paying principal and interest on the loan currently?
Do you have an offset account or is your loan bundled with a redraw and free extra repayment options etc, ie, have you payed down any of the loan beyond standard payments?This will all effect how you set it up from a tax point of view.
Thanks for your responses.
In answer to these questions:
Not leaving the country, not going to live with parents: going to rent cheaply elsewhere.
The plan is to keep the house until the market improves, and then sell – no particular time-frame, but I doubt it will go past 6 years.
The loan is a discounted variable rate (8.7% another year left of the discounted rate).
Both of us work full-time, and our net income is around $3000 per fortnight.
Yes, we pay tax! Both of us pay HECS and SFSS as well
We are paying the principal plus interest, and currently pay $100 more each fortnight beyond the minimum. We can redraw for a fee (I believe, and have the whopping sum of $4600 for that if we want!).
Hi Mini,
If you lived in the property as soon as possible after purchasing it, you have established the property as PPOR (and hence can use the 6 year absence rule to rent out it for up to 6 years and can sell it CGT free).
Paper work involved would be just to have a lease agreement between yourself and the tenant. If the property was built post 1985, it is worth considering getting a Quantity Surveyor to prepare a depreciation report to calculate how much depreciation you can claim each year (Approx $400-500)
Only catch is that you must not OWN another PPOR while you rent out your property (by renting a cheaper place yourselves is fine).
One final tip is to change your repayment stream to Interest only. Its all about prioritising your capacity to repay loan principal and maxmising your tax deduction. You're better off paying Int only and using excess cash each month to pay off your HECS debt or any other non-tax deductible loans you have.
Hope this helps.
hi mini,
i agree with everything said above, stop paying any extra onto the loan and set up interest only to max deductions as mentioned and pay down other debt. ideally if you had had an offset acccount rather than an all in one loan with extra repayments you would have been better off (as you could have isolated this money in the offset from the loan and got the full tax benefit of the original amount you borrowed and not the lesser amount you have now.. My view is consider when setting up a PPOR loan if theres a chance of moving out and renting it out.. .
Even if you dont plan to move and rent it I still think the best setup for a PPOR is an interest only loan with an offset account as it allows full flexiblity and still reduces your interest repayment on the PPOR the same as as a principal and interest loan with extra repayment allows you to do.
So if you move back after the 6 yr rule than keep it interest only with an offset account, just dont use the offset account when you renting it out obviously unless you have paid of all your non deductable debt.
hope this helps too.
EH
I think it would be better to pay off your loans first and not your HECS with your excess cash because the HECS interest rate is the inflation rate, which is less interest rate than your loans.
Thanks so much for the advice!
I need to think more about the HECS and SFSS thing, as my view at the moment is that the sooner it gets paid off, the sooner my pay packet will be bigger! It's a fair chunk (top rates for both) of my pay.
I do want to ask about "Only catch is that you must not OWN another PPOR while you rent out your property (by renting a cheaper place yourselves is fine)." I am not quite sure about this part, whether it relates directly to the point immediately above, or …
Hi Mini,
The 6 year rule.
You can own a PPOR and move out and rent it for up to 6 years, sell and not have to pay CGT, PROVIDED you have not purchased another PPOR during that time. (Came about as politicians moved to Canberra for 2 x 3 year terms and didnt want to pay tax if they sold there house). You can claim appropriate deductions during the rental period. Of course check all this with your accountant. The advice about getting a vlaue is worthwhile. It may come into play if you end up purchasing another PPOR prior to disposing of the first.
Hope that helps
MickHello Mini
The "only catch is….." statement relates to the 6 year rule Kevin mentioned in the first paragraph of his post.
The rule is that you can rent out your PPOR for up to 6 years without effecting it's CGT free status.
Obviously you can't buy another property in that period and claim it as your PPOR as well.For clarity, you can own another house and live in it and not decide which one you want the CGT free exemption for until you are ready to sell one of them.
Hope this helps
ElkaThat all makes sense – thank you all! Um (bit embarrassed) I should have worked that out only my eyes/brain did not read the 'not' and hence my confusion.
So, my understanding about renting out our house is that all that is needed (apart from taking into account the financial advantages/disadvantages of different options re loan type, HECS/SFSS and the 6 year CGT rule, which would be best worked out with an accountant/financial advisor) is to start a lease agreement with tenants, and then all other financial stuff gets sorted out (income and allowable deductions) at tax time. The bank does not need to know?
Thanks again for all the advice and things to consider – it is most helpful.
Mini
You don't have to physically change it anywhere, it just becomes an investment property by nature of the fact that you have probably moved out of it and put a tenant in. Important things to do are to note the date it all happens, keep good records suchas spreadsheets, tenancy agreements etc FOREVER. You can be audited by the tax office for up to ten years (or longer if they suspect fraud). I say forever, as you might for example keep the property for 20 years say and rent it out the majority of that time. You will need every receipt, rate notice etc after from that time to work out the capital gains, and accurate records gives you the figures to ascertain your cost base. Also it's imperative to obtain a valuation as soon as possible – the higher the valuation at change date or thereabouts the better for you later when it comes to working out capital gains tax if you sell for example as the amounts that matter are the value at the date of change and the sell price and date, if this is what occurs. The capital gains tax will be based 50% of the difference, so the less the difference the better if you get the drift. ATO has some good free booklet publications they can send if you ring their number and request them.
Thanks so much Marianne (and others). This is whole new world for us, so the advice is very welcome and very useful!
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