Property: Rent and Invest vs Owner Occupy

Lxylarr on 30/05/2022 - 11:25

I'm thinking of moving so I'm looking around for places that will end up being more convenient for me to get to work among other reasons.

I currently own my place (along with the bank). One of the places I was looking is brand new - still stock with the developer. I was thinking an option might be to buy that place as an investment and then rent another place. I have enough equity in my current place that any new place, even for a bit higher price including moving costs (looking at you stamp duty), I can positively gear the place. Since it is new, and no-one has ever lived in it, I think I can still access building depreciation and also all the appliance depreciation etc - the depreciation is the thing that will generate the most deductions I think, not the interest so much.

The point is, I can get the government and the renter to effectively pay for this place while I rent something.

Has anyone considered this. I did some googling, and it seems to be a not uncommon strategy. I would still have enough equity (accessible in the offset account) to handle periods when it is unrented.

Thoughts?

Financial

Comments

  • deme on 30/05/2022 - 11:29
    +5

    No.

    Google CGT

    • oscargamer on 30/05/2022 - 12:21
      -6

      Always ways around this. Depending where OP is, it's easy to 'live in it' for the minimum period (maybe 6 or 12 months) then rent it out for years, before CGT rears it's head. Then you can reset the timer if you live in it again…..

      • CrowReally on 30/05/2022 - 12:24
        +13

        This is an excellent strategy to ensure your current exempt residence becomes liable for CGT as well.

        • oscargamer on 30/05/2022 - 12:32
          -4

          OK…you might have noticed the quotation marks around 'live in it'

          https://media.giphy.com/media/qs6ev2pm8g9dS/giphy.gif

          • CrowReally on 30/05/2022 - 12:35
            +7

            @oscargamer: You can only have one exempt Primary Place Of Residence (PPOR) at a time, 'genius'. Trying stuff like this is exactly what causes the tax problem I mentioned.

            Note my use of the quotation marks in my first paragraph.

            • oscargamer on 30/05/2022 - 13:09
              -2

              @CrowReally: OK…work with me

              House 1 - already owned by OP
              House 2 - to be bought

              House 1 is exempt from CGT for 6 years (in VIC at least, cos the OP lives there now)
              OP buys House 2 and lives there for 1 year (in VIC) while renting out House 1. OP then moves back to House 1. House 2 is CGT exempt for the next 6 years as OP lived there for the first year.

              CGT and PPR are connected, but not as exclusively as you suggest.

              • CrowReally on 30/05/2022 - 13:20
                +6

                @oscargamer: I'm well aware of the 6 year rule that you're awkwardly fumbling with. It's explicit that you can only treat one residence as your PPOR at a time.

                "Yeah okay, even if you live somewhere else, you can still call the old house 'your main residence'. Heck, you can even rent it out for up to six years and it's fine". That's how you prevent your old house from getting a CGT problem. But while you're doing that, you can't call any other place your main residence. Because you're only allowed one.

                If you're temporarily living overseas or renting then you don't care about the CGT on 'your new place', which is how the scheme works. That's not the case here.

                • oscargamer on 30/05/2022 - 14:02

                  @CrowReally: So…is the following scenario correct?

                  OP buys house 2.
                  OP lives in house 2.
                  OP rents out house 1 for 5y11m then sells it.
                  There is no CGT on house 1?

                  • CrowReally on 30/05/2022 - 14:09
                    +3

                    @oscargamer: OP can do that if OP wants (they claim House 1 as their "main residence" for the first 5 years, 11 months living in House 2).

                    They sell House 1 and there's no CGT because it's their main residence.

                    But House 2 now has a period of 5 years 11 months that is ineligible for the main residence exemption. If they sold House 1, made House 2 their "main residence" and sold House 2 one month later then 71/72ths of the proceeds would have CGT [72 months total, only 1 month is CGT exempt].

                    Because you can only have one place exempt from CGT as your main residence at a time.

              • deme on 30/05/2022 - 14:08
                +3

                @oscargamer:

                House 1 is exempt from CGT for 6 years (in VIC at least, cos the OP lives there now)

                Mate just stop, this tax is federal, you are showing you have no idea.

                • oscargamer on 30/05/2022 - 14:17

                  @deme: I don't have much knowledge, but maybe I've been 'lucky' as we did the below and got no CGT……

                  Bought house 1 in 2008, lived in it as PPR until 2012.

                  Moved to a rental in 2012 (PPR) and rented out house 1.

                  Bought house 2 in 2014 and rented it out for 2 years while still living in rental (PPR).

                  Sold house 1 in 2016. No CGT.

                  Moved from rental (PPR) into house 2 (now PPR) in 2016.

                  Sold house 2 last tax year. No CGT (despite it being rented out from first owning for 2 years, then lived in as PPR for 4 years.)

                  All rentals used REA's

                  Maybe this explains where my misunderstanding comes from….?

                  • deme on 30/05/2022 - 14:18
                    +6

                    @oscargamer: It's because you lied on your tax return.

                    • oscargamer on 30/05/2022 - 14:18
                      -1

                      @deme: No i (profanity) didn't

                      • deme on 30/05/2022 - 14:20
                        +1

                        @oscargamer: Yeah you did.

                        https://www.ato.gov.au/Individuals/Capital-gains-tax/Property-and-capital-gains-tax/Your-main-residence-(home)/Moving-to-a-new-main-residence/

                        You have 6 months to move houses.

                  • CrowReally on 30/05/2022 - 14:56
                    +7

                    @oscargamer: Yeah, your 'luck' came from doing your CGT calc wrong and not putting House 2 in your tax return. It was liable for CGT from 2014 to 2016.

                  • freefall101 on 30/05/2022 - 15:41
                    +6

                    @oscargamer: All you did was not report the CGT on your return last year. It might take them a while, but since the ATO does data matching they might catch it and send you a letter eventually. Depends whether that's a target for audits anytime soon (probably not with all the small business compliance they have to worry about).

                    You can only claim one property at a time. From 2014 to 2016 you claimed two.

                    Are you sure you're not confusing it with land tax? That's Victoria specific and uses the phrase "principal place of residence" and has a 6 year rule and some exemptions for overlap (although it's not two years, so you might owe that too, lol). ATO call it main residence exemption and you can't definitely only have one property at a time regardless of the 6 years.

                  • wei13 on 30/05/2022 - 16:10
                    +2

                    @oscargamer: Definitely wrong.

                    Property 2 is liable for CGT tax from 2014-2016 (can only have 1 PPR exemption at one time). Your CGT will be proportioned by time (ie 2 years out of 7 years), less any capital losses that you might have to be applied, then also eligible for CGT discount of 50% (as held for investment more than 12 months).

                  • SlickMick on 31/05/2022 - 09:23
                    +2

                    @oscargamer: You should lodge a correction to your tax return and pay the CGT on house 2 from 2014-2016, since you didn't on house 1.

                    The tax office might take years to track you down, but they will add fines and interest and you will have a big debt.

                    It's in your interest to confess a mistake rather than get caught.

                • techlead on 31/05/2022 - 10:52

                  @deme: That's when I knew…that guy has no idea what he's talking about.

                  CGT is part of the Federal tax code administered by the ATO, so it doesn't matter if you are in VIC, NSW, QLD or any other Australian state. "facepalm"

          • techlead on 31/05/2022 - 10:06

            @oscargamer: So you want to commit fraud, actual fraud not "fraud". lol

            What you described is fraud, the ATO should crack down on these shenanigans.

  • bobbified on 30/05/2022 - 11:40
    +9

    The point is, I can get the government and the renter to effectively pay for this place

    Let's get this straight - regardless of how the property is geared, the government isn't paying for sh.t. Deductions just mean that you're paying the government less.

    • xylarr on 30/05/2022 - 15:25

      Well yes, you're right, but paying the government less is mathematically the same as them giving you the money, Though interestingly, it would become a consideration if I had no income to deduct against. If positively geared, there would be that income, but I also work.

      • SlickMick on 31/05/2022 - 09:30
        +1

        It baffles me that anyone could think that statement is true, yet I hear it all the time. e.g. "just pay an accountant, it's tax deductible".

        Me spending 70% instead of 100% is still me doing the giving.

        How can you possibly see that as the tax office giving you anything??

  • Muzeeb on 30/05/2022 - 11:40
    +2

    not uncommon

    So common?

    • whatwasherproblem on 30/05/2022 - 14:11
      +3

      You're not wrong.

    • xylarr on 30/05/2022 - 15:26
      +2

      More common than rare, but less common than common?

      • Muzeeb on 30/05/2022 - 15:34

        That makes sense. Cheers

  • Quantumcat on 30/05/2022 - 12:00

    Deductions just mean you get a discount on what you pay, you never get more than you spend. If you are getting a tax deduction it means you must be getting less income than you would get if you didn't own the place. Tax deductions are just meaning you are losing a little less money while waiting to sell it and make your money then.

    • xylarr on 30/05/2022 - 15:31

      I guess I'm thinking of things such as depreciation deductions available on construction costs - 2.5% a year over 40 years. You also get the usual deductions for interest and expenses. For PPR, the expenses are still there and you don't get the depreciation deductions. This is hopefully offset by the capital gains exemption, but if things stay steady or go south? I guess the other thing is how do the deductions on construction costs affect your cost base - it might just end up increasing your net capital gain in the future, though they are 50% discounted.

      I guess I was asking because there seem to be a whole ton of moving parts.

      I've sent an email to my accountant - I'll likely sit down and have a (paid) session with them to work all this out.

  • djones145 on 30/05/2022 - 12:20

    why not do all three? some do
    have own house, rent for school catchment and invest as well

    • xylarr on 30/05/2022 - 15:32

      I'll start with just owning one place for now :)

      • MrBear on 31/05/2022 - 10:49

        You already do.

  • Ocker on 30/05/2022 - 12:49
    +4

    Minor correction - it's not the "government" that will effectively pay for the place - it's your fellow taxpayers.

    • Quantumcat on 30/05/2022 - 13:49

      Nobody will pay for the place which is the point - any deductions are always less than what you are paying

  • rektrading on 30/05/2022 - 12:54

    "Just do it" or someone else will.

  • aidenh37 on 30/05/2022 - 13:05
    -6

    IMO investing in property just seems immoral and too difficult for what it is.

    Just buy (or rent) to get your dream home, and invest in stocks.

    • rektrading on 30/05/2022 - 13:18
      +6

      Making 💵 legally isn't immoral.

      • aidenh37 on 30/05/2022 - 14:15

        I suppose… Can someone ELI5 investing in property? I do think it is a bit difficult for the gains, looking at the math it just doesn't seem to check out.

    • andresampras on 30/05/2022 - 13:52

      I'm sure 'immoral' wasn't the word you were looking for.

      • aidenh37 on 30/05/2022 - 14:15

        I think you're right… Can someone ELI5 investing in property? I do think it is a bit difficult for the gains, looking at the math it just doesn't seem to check out.

    • whatwasherproblem on 30/05/2022 - 14:12

      IMO investing in property just seems immoral and too difficult for what it is.

      Cringe and XiJinping-pilled.

      • aidenh37 on 30/05/2022 - 14:16
        +1

        I swear I'm not far left, just a centralist OOTL

  • Drakesy on 30/05/2022 - 14:06

    Well none of us are financial advisors (but lets be honest everyone's just as qualified as one).

    If you're in NSW/Victoria you could be playing with fire, and end up in an equity hole. Just be prepared for a 15-20% correction and proportional decrease in net equity.

    Personally I think the investor thing may have overcooked us and we're in for a few if not a 5-6 year recession while wages catch up with ridiculous house prices.

    Its the risk if there's a sudden lump of people selling as a result of refinancing/their home no longer positively geared then it'll get interesting.

    Perth corrected by 30% last time we had a slump (without interest rate hikes) i think it's possible for something similar, albeit not as extreme to happen again.

    I'd own occupy in this housing market rather than subject my property to CGT.

    • netjock on 30/05/2022 - 14:32

      Don't worry Albo has your back. 4% deposit and tax payers will stump up the rest. A bit like NBN but ever better because the fool with 4% deposit also pays all out goings and the government will swoop in for % of the profits.

      On top of that you get a zero FBT BEV in the drive way.

      I didn't vote for either of the big 2 parties. It is cost free virtue signaling.

      • Drakesy on 30/05/2022 - 14:43
        +1

        Don't worry neither Labor or liberal's ham fisted approach to getting people into property has really convinced anyone.

        But you're right
        Theyre both terrible policies

        • netjock on 30/05/2022 - 15:04

          Going to be fun.

          Someone was saying on a podcast the average Sydney mortgage now is $800k and a 1% interest rate increase is an extra $1k a month. Going to 3% is going to be fun for them.

          But the average mortgage is 18 months ahead in their repayments so going to 3% will bleed them dry too.

          The tide is going out and who is going to be left naked. Lets so who is naked and also holding Albo.

    • xylarr on 30/05/2022 - 15:22

      Ahhh, but if it tanks, then I would get a capital loss.
      Maybe I should only invest in a declining market /s

      • Quantumcat on 30/05/2022 - 15:59
        +1

        You can only carry forward the capital loss to a future tax return, so you'll have to make a capital gain later to take advantage of it

  • wei13 on 30/05/2022 - 16:22

    Lot of it will depend on cash flow. If you can rent yourself for less than what your property will bring in, then you will have more 'cash' on hand renting, than living in the property yourself.

    However, you will sacrifice Capital Gains down the track. As a PPR you can be CGT exempt when you sell it. If you rent out your property, all the building depreciation you are claiming each year (which increases your cash flow now) will need to be taken out of the cost base of the property, so that when you do sell it your property will have a lower cost base, and hence higher capital gain, and more CGT to pay.

    • xylarr on 30/05/2022 - 19:25
      +1

      Thanks, this is the answer I was looking for.
      I guess while you gain cashflow now, you pay later via CGT.

    • kiitos on 01/06/2022 - 08:01

      I didn't know about the depreciation affecting the cost base!

  • MeesusEff on 30/05/2022 - 19:15

    I think you need to speak to an accountant first to make sure you're CGT exempt. We bought out house in 2017, lived in it for 2 years then moved into my parents house and put our place up for rent. We are looking to sell this year and my accountant confirmed it will be CGT exempt.

  • techlead on 31/05/2022 - 10:00
    +1

    Definitely Rent and Invest (not in property).

    What people fail to realise is that if you own your own house, the house is a liability. Its not giving you cash flow, all its giving you are expenses and debts. Think about it, let's say you bought a house for $1 mil, its now worth $2 mil after 5 years. (YAY!) Now what? How do I take that $1 mil out? You can refinance, take on debt, but that comes with risks of course and fees too. If you sell the house, where are you going to live? If you want to buy another house, you'd be paying inflated prices too because other houses have increased in value, not just yours.

    I'm so glad I saw this logic back in 2013. I had a choice, to purchase a property or buy Bitcoin. I'm so glad I chose the latter. I can retire now, house prices are of no concern to me. I'm just on the sidelines with my popcorn.

    • rektrading on 31/05/2022 - 10:06

      If you sell the house, where are you going to live?

      Never sell prime hard assets.

      "Buy, borrow, die."

      • techlead on 31/05/2022 - 10:09

        That's very true. I'm never selling my prime hard assets, Bitcoin and ETH.

        • rektrading on 31/05/2022 - 10:12

          There are also only a limited number of prime land.

          That can be CBD, waterfront, farmland, mineral-rich land, etc.

          • techlead on 31/05/2022 - 10:14
            +1

            @rektrading: The issue is remote working has blew that out of the water.

            I'm looking for a new house now, I have now dropped my requirement that it be 15 minutes walking distance from a train station. There's no need anymore as I'm working from home most of the time and only head into the office once or twice a week and I drive in for that, I haven't taken any public transport since the lockdowns in 2019.

            What can be considered as "prime land" has expanded.

            • xylarr on 31/05/2022 - 12:01

              @techlead: This is interesting, and for me, the new place must have a place for a study that is more than just using a bedroom.

              • techlead on 31/05/2022 - 12:39

                @xylarr: I already have a huge place for my home office which has my mining rigs in there to give me warm. My beauty profit making machines which also warms me up. I move them out in summer hahaha, too hot otherwise.

                My new place must have a similarly large office, that's an essential requirement. I might turn it into a cinema as well, so its dual use. Hmm, the possibilities.

                Main point is, being close to transport hubs are no longer an essential requirement for many people. In fact, I like to be further away so there's less pollution, noise and thoroughfare.

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