Hi Al, wondering if anyone can help me with this.
If my current PPOR under fixed rate OO home loan for lets say 2 year, can I move out and rent this property as IP? Do I have to change the home loan to IP fixed rate? What are the pros and cons of doing this?
You can get around the 1 PPOR requirement by having your second loan with a different bank.
Thanks, didn't know that.
I had assumed when you go for that second loan (bank 2) and they want all your financials etc, they would ask you to clarify which one is the intended PPOR as they would look at expected rental income, which would depend if it was property 1 or property 2.
:)
They will ask for details on loans, but I would assume they are only interested in amounts
Accountant told me that no, you don't have to let the bank know of the change and can leave as Owner occupied loan for a tax return perspective. As long as the intent of your loan is for investment, which if you move out it changes to at that date.
The banks however will want to know, as it's to do with their regulatory requirements how they treat them, but that's their problem not yours. If you let the bank know you are changing, investment rates are higher than owner occupier, so you'll be worse off financially.
Thanks for the info. What are the pros and cons of having OO loan when renting it out as IP? Can I still claim tax deduction?
If bank found out that I have been renting it out, can they force me to change to IP home loan?
Lower interest would be the main benefit. There was a significant difference when I was looking at it, and yes, the accountant said they are tax deductable, the ATO doesn't care what you tell the bank the purpose of the loan is, as long as your actual use of it was for investment. I have done it since a couple of times when doing an equity release on my primary residence as well.
Thanks for the info. Lets say if the OO home loan is under variable, does that mean when I rent out property, bank will automatically switch it to IP home loan if they found out about it? I was under assumption that if I fixed the loan they wouldn't be able to change it to IP loan but if it's under variable rate the bank can change it to IP loan. Is that true?
Second what conan2000 said.
There is no requirement from the ATO perspective on whether or not you have to call your loan a 'investment loan' or 'home loan'. Just so long as you are aware that there are apportionment rules for CGT when it comes time to sell your house.
Hi Hyouden, so if I sell this property before 6 years as IP I don't have to pay CGT right?
If it was just a simple, I bought the house more than 12 months ago, always lived in it (i.e. main residence test satisfied), only made income off of it (any income - rental, office space) less than the next 6 years and never treated any other properties as my main residence then yes, under current legislation it will be CGT exempt when you sell it.
Depending on your situation (you should double check with your accountant or seek legal advice), there are 2 different rules at play here and both need to be satisfied.
1st rule - you can claim CGT exemption if you choose to nominate your property as your main residence providing:
- up to six years if it is used to produce income
- indefinitely if it is not used to produce income
- can't treat any other dwelling as your main residence for that period (except for a limited time if you're moving house)
(https://www.ato.gov.au/general/capital-gains-tax/your-home-a…)
If you've got a new house (or if it satisfies a new 'main residence'), you need to apply the 2nd rule
2nd rule - you can only nominate 1 property to be your main residence:
- there is a grace period of up to 6 months
(https://www.ato.gov.au/general/capital-gains-tax/your-home-a…)
There are various sub-rules that have to be met (e.g. how long you've held it for, what part of the house you have used for income producing activities, etc) that will affect how much CGT you do/don't pay.
Hope this helps you.
Thanks for the info. I have lived in the current PPOR for more than 6 years and thinking of selling once the market is a bit better, probably in 3-5 years time. If I do that, I will get CGT exemption right?
@keongperak: I'm assuming from the above information that you do not intend to purchase another property in the next 3-5 years (or nominate another property as your main residence) prior to selling.
In which case, only rule 1 will apply so, yes, you will be exempt from CGT.
Again, disclaimer, I am not your accountant so best to speak to him/her :)
Owner - Occupied loan generally has you paying principal and interest. With investment loan, you can change it to interest only, but will likely pay a higher rate. You won't be able to tax deduct the principal payment, but naturally can with any interest on either loans for rentals.
With one of my investment properties, I have it as principal + interest which is the same repayments if it were owner-occupied.
You need to be careful. If you have redrawn any extra payments then this makes calculations of interest more difficult. As the ATO will consider this a new loan and is no longer associated with the house which will be the income earner. So any interest associated with a redraw amount is no longer a tax deduction. Google Tax Ruling TR 2000/2 for examples of this.
Thanks for the info. I will make sure not to redraw money from this account. It won't be a problem if I make extra payment to the account correct?
I did this a few months ago. I refinanced with ME bank, they have a deal where you can have two houses under one interest rate, as long as the owner occupied one is a larger loan than the investment you get the lower interest rate on the whole thing. And you can choose which house to put money against so you can funnel most of your money to the PPOR for tax advantage. Worth asking your broker about if you have the same circumstance.
Thanks for the info. That is a smart idea.
Are you buying or renting a new place?
If renting, just leave it.
If buying, I assume you're only supposed to have 1 PPOR loan so you may have to change it. However, since it's fixed, they should not be able to change the interest rate.