Somersoft Property Investment Forums  

Go Back   Somersoft Property Investment Forums > Property Investment Discussions > Innovative Techniques

Reply
 
Thread Tools Display Modes
  #1  
Old 11-04-2012, 10:56 PM
JohnHenry's Avatar
JohnHenry JohnHenry is offline
Mister
 
Join Date: Jun 2011
Location: Wollongong
Posts: 330
JohnHenry will become famous soon enough
Question Living in the property vs. rent out as IP while renting myself

Hi people,

What's your suggestion and opinion regarding the two options below:

1. Buy a property and then you live in it (renting one of the spare room)
2. Buy a property and then rent that out fully while rent myself in some other location.

Which option is the most profitable do you think ?
Reply With Quote
  #2  
Old 11-04-2012, 11:06 PM
D.T.'s Avatar
D.T. D.T. is offline
Apprentice slumlord
 
Join Date: Feb 2003
Location: Perth, WA
Posts: 5,600
D.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond reputeD.T. has a reputation beyond repute
Really depends on situation.

Are you eligible for FHOG?
What are your living arrangements at the moment? PPOR / renting etc

Also, quite often, the areas we'd want to invest in are NOT the areas we'd want to live in.

What are you trying to achieve?
__________________
Dave
A lion doesn't concern himself with the opinion of a sheep..
~ Tywin Lannister
Reply With Quote
  #3  
Old 11-04-2012, 11:36 PM
JohnHenry's Avatar
JohnHenry JohnHenry is offline
Mister
 
Join Date: Jun 2011
Location: Wollongong
Posts: 330
JohnHenry will become famous soon enough
Not anymore I'm not eligible for FHOG since I already have IP which was my PPOR, I'm trying to keep my cash flow controllable while still having a enjoyable life.
Reply With Quote
  #4  
Old 12-04-2012, 12:25 AM
Terry_w's Avatar
Terry_w Terry_w is online now
Broker, Solicitor, Tax
 
Join Date: Mar 2012
Location: Sydney, NSW
Posts: 7,204
Terry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond repute
Do the sums and work it out. It should be a simple mathematical answer - and then the not so simple personal and family preferences.
__________________
Terryw - Lawyer - Finance Broker - Chartered Tax Advisor
Reply With Quote
  #5  
Old 12-04-2012, 02:51 AM
matto_ matto_ is offline
Member
 
Join Date: Apr 2010
Location: Melbourne
Posts: 993
matto_ has a spectacular aura aboutmatto_ has a spectacular aura about
If you look in the spreadsheet thread there are some sheets that have been set up for this particular dilemma, well the financial part anyway.

Howeveras Terry points out, that is only one part of the equation
Reply With Quote
  #6  
Old 12-04-2012, 09:10 AM
RumpledElf's Avatar
RumpledElf RumpledElf is offline
all fun in the big city!
 
Join Date: Apr 2008
Location: Sydney
Posts: 5,625
RumpledElf is a splendid one to beholdRumpledElf is a splendid one to beholdRumpledElf is a splendid one to beholdRumpledElf is a splendid one to beholdRumpledElf is a splendid one to beholdRumpledElf is a splendid one to beholdRumpledElf is a splendid one to behold
If you're young, single, and don't have a house full of precious Stuff, I reckon getting a 3br place and renting out the other two bedrooms is the best way to get ahead. Then kick the housemates out (or move out into a new house) when you want to get married and have kidliwinks.
__________________
Low income property investing - because we're not all rich.
Need a website made? We can do that!
Reply With Quote
  #7  
Old 12-04-2012, 10:03 AM
Ideo Ideo is offline
Member
 
Join Date: Sep 2011
Location: On the road. NSW Wide.
Posts: 3,112
Ideo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond reputeIdeo has a reputation beyond repute
Quote:
Originally Posted by JohnHenry View Post
Hi people,

What's your suggestion and opinion regarding the two options below:

1. Buy a property and then you live in it (renting one of the spare room)
2. Buy a property and then rent that out fully while rent myself in some other location.

Which option is the most profitable do you think ?
I've chosen option 2.

It may not be the most profitable, but it is the approach that works best for me.
__________________
http://thedesignpartnership.com.au/

Town Planner, Heritage and Safer By Design/CPTED Consultant
Reply With Quote
  #8  
Old 12-04-2012, 12:41 PM
tobe tobe is offline
mortgage broker
 
Join Date: Mar 2007
Location: melbourne victoria
Posts: 2,741
tobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to behold
option 2 gives you more serviceability and therefore a higher loan amount available.
Reply With Quote
  #9  
Old 12-04-2012, 02:07 PM
The Chaser The Chaser is offline
Member
 
Join Date: May 2008
Location: Perth, WA
Posts: 294
The Chaser will become famous soon enough
Quote:
Originally Posted by JohnHenry View Post
Not anymore I'm not eligible for FHOG since I already have IP which was my PPOR, I'm trying to keep my cash flow controllable while still having a enjoyable life.
Hi there

One other thing that you will need to consider in your calculations if you aren't already is the future affect of CGT should you choose to sell either of your properties.

For your existing PPOR that is now an IP you could ultimately choose to claim the six-year CGT exemption should you choose to sell this property within the first six years it is rented (or you move back in before the 6 years is up and then decide to eventually sell). In which case you couldn't also claim a CGT exemption for the property you are considering buying because it can only apply to one PPOR in any given period of time. So whether you rent out a room(s) or not, the whole property would incur CGT on sale.

Alternatively let's say that you buy another property as per your original post and intend claiming that property as your PPOR. It's my understanding that if you rent out part of your home, you lose part of your main residence exemption for CGT purposes. So if you use part of the property to produce rental income whilst you are also living there, your main residence exemption would be lost for the portion of the property utilised for the period it was rented and on a pro rata basis. However you can increase your cost base by the ownership costs you haven't been able to claim as a tax deduction during your period of ownership.

Hopefully that all makes sense. The bottom line is that if you ultimately intend selling one or both of your properties in the next few years, then you really want to consider the CGT scenarios, as this can have a big effect on your question as to which option may be the most profitable.

Please be aware that the information above is just my personal unqualified understanding, so you should definitely make your own enquiries as to its accuracy!

Good luck with your decision!

Angela
Reply With Quote
  #10  
Old 12-04-2012, 02:56 PM
matto_ matto_ is offline
Member
 
Join Date: Apr 2010
Location: Melbourne
Posts: 993
matto_ has a spectacular aura aboutmatto_ has a spectacular aura about
Quote:
Originally Posted by The Chaser View Post

It's my understanding that if you rent out part of your home, you lose part of your main residence exemption for CGT purposes. So if you use part of the property to produce rental income whilst you are also living there, your main residence exemption would be lost for the portion of the property utilised for the period it was rented and on a pro rata basis. However you can increase your cost base by the ownership costs you haven't been able to claim as a tax deduction during your period of ownership.
I had heard the above also. and was hoping for clarification.

"My Friends" Scenario: Bought PPOR - lived in it for 1 year, before deciding they wanted to have a couple of flatmates in the rooms which werent being currently used. For 3 or so years - had the additional two rooms rented.

Subsequently the PPOR main residence has been claimed on this property for a further 7 or so years (presuming that the entire CGT would be covered), however based on the above this would not be the case.

Question:
When would the pro-rata-ing start and stop (and would it continue for the life of the property),
What proprtions would be looked at (in this case there was actually the two owners and two renters living in the house).
How could I calculate the net impact on CGT payments?

As an aside - this really doesnt make sense to me (but then again I guess ATO rulings dont need to make sense).

Thanks,

Matto
Reply With Quote
  #11  
Old 12-04-2012, 02:59 PM
Terry_w's Avatar
Terry_w Terry_w is online now
Broker, Solicitor, Tax
 
Join Date: Mar 2012
Location: Sydney, NSW
Posts: 7,204
Terry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond repute
it does make sense.

The absence from main residence rule only applies when a person is absent from the main residence. If you are renting out rules while you are still there you are not absent so the rule won't apply.
__________________
Terryw - Lawyer - Finance Broker - Chartered Tax Advisor
Reply With Quote
  #12  
Old 14-04-2012, 05:58 PM
kiwipaul kiwipaul is offline
Member
 
Join Date: Aug 2010
Location: Brisbane
Posts: 34
kiwipaul is on a distinguished road
I've been told on another forum that if you rent a room for say $100 per week this is considered income and needs to be declared and property will be subject to CGT pro rata.

However if you take in boarders and split the cost of all the expenses between the boarders equally this is not considered income and you wouldn't be liable for CGT.

Cannot find anything on the ATO web site but I have my doubts whether this is true or just some punters way of avoiding declaring this income.
Reply With Quote
  #13  
Old 14-04-2012, 06:24 PM
Terry_w's Avatar
Terry_w Terry_w is online now
Broker, Solicitor, Tax
 
Join Date: Mar 2012
Location: Sydney, NSW
Posts: 7,204
Terry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond repute
If your property is income producing then CGT may apply.

Renting out rooms would mean the property is income producing. Boarders is not because you are just letting someone stay over.

see para 17 of TR 2167
http://law.ato.gov.au/atolaw/view.ht.../NAT/ATO/00001
__________________
Terryw - Lawyer - Finance Broker - Chartered Tax Advisor
Reply With Quote
  #14  
Old 17-04-2012, 01:20 PM
matto_ matto_ is offline
Member
 
Join Date: Apr 2010
Location: Melbourne
Posts: 993
matto_ has a spectacular aura aboutmatto_ has a spectacular aura about
Hi Terry,

Thanks for the response.

=====
Leading on from the above - if I were to sell the aforementioned PPOR - how would the CGT be calc-ed?

=====

Additional/separate question
A different friend is talking about setting up a trust to buy a property in - and then the trust rents the property out to himself (charging an appropriate market rate).

Does this work?
Reply With Quote
  #15  
Old 17-04-2012, 04:24 PM
Terry_w's Avatar
Terry_w Terry_w is online now
Broker, Solicitor, Tax
 
Join Date: Mar 2012
Location: Sydney, NSW
Posts: 7,204
Terry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond repute
Quote:
Originally Posted by matto_ View Post
Hi Terry,

Thanks for the response.

=====
Leading on from the above - if I were to sell the aforementioned PPOR - how would the CGT be calc-ed?

Does this work?
Do you mean, if he lived in it for 1 year and then rented out 2 rooms?

I would think the first year would be CGT and then possibly 2/3 of the property would be subject to CGT (assuming 3 bedrooms and tenants shared rest of house.

=====
Quote:
Originally Posted by matto_ View Post

Additional/separate question
A different friend is talking about setting up a trust to buy a property in - and then the trust rents the property out to himself (charging an appropriate market rate).

Does this work?
This works, but whether the trust can claim costs associated will depend on a number of factors. There is an old TR where the ATO warns against renting from your own unit trust - ie they are looking closely at the arrangements.

If it is a discretionary trust then it may work but the trust may end up with a loss and if it was no other income then this loss won't help save any tax.
__________________
Terryw - Lawyer - Finance Broker - Chartered Tax Advisor
Reply With Quote
  #16  
Old 17-04-2012, 04:27 PM
tobe tobe is offline
mortgage broker
 
Join Date: Mar 2007
Location: melbourne victoria
Posts: 2,741
tobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to beholdtobe is a splendid one to behold
Quote:
Originally Posted by Terry_w View Post
If your property is income producing then CGT may apply.

Renting out rooms would mean the property is income producing. Boarders is not because you are just letting someone stay over.

see para 17 of TR 2167
http://law.ato.gov.au/atolaw/view.ht.../NAT/ATO/00001
cheers Terry, thanks for clarifying that for me.
Reply With Quote
  #17  
Old 17-04-2012, 08:22 PM
JohnHenry's Avatar
JohnHenry JohnHenry is offline
Mister
 
Join Date: Jun 2011
Location: Wollongong
Posts: 330
JohnHenry will become famous soon enough
Question

Quote:
Originally Posted by Terry_w View Post
Do you mean, if he lived in it for 1 year and then rented out 2 rooms?

I would think the first year would be CGT and then possibly 2/3 of the property would be subject to CGT (assuming 3 bedrooms and tenants shared rest of house.

=====


This works, but whether the trust can claim costs associated will depend on a number of factors. There is an old TR where the ATO warns against renting from your own unit trust - ie they are looking closely at the arrangements.

If it is a discretionary trust then it may work but the trust may end up with a loss and if it was no other income then this loss won't help save any tax.
So in general, when we are still at the initial stage of investing, do the negative gearing but when all of the IP started to generate additional income cash flow (CF+), do the trust setup to self rent as discussed above?
Reply With Quote
  #18  
Old 17-04-2012, 08:34 PM
Terry_w's Avatar
Terry_w Terry_w is online now
Broker, Solicitor, Tax
 
Join Date: Mar 2012
Location: Sydney, NSW
Posts: 7,204
Terry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond reputeTerry_w has a reputation beyond repute
Quote:
Originally Posted by JohnHenry View Post
So in general, when we are still at the initial stage of investing, do the negative gearing but when all of the IP started to generate additional income cash flow (CF+), do the trust setup to self rent as discussed above?
Not sure where you are going with this??
__________________
Terryw - Lawyer - Finance Broker - Chartered Tax Advisor
Reply With Quote
  #19  
Old 18-04-2012, 11:22 AM
matto_ matto_ is offline
Member
 
Join Date: Apr 2010
Location: Melbourne
Posts: 993
matto_ has a spectacular aura aboutmatto_ has a spectacular aura about
Quote:
Originally Posted by Terry_w View Post
Do you mean, if he lived in it for 1 year and then rented out 2 rooms?

I would think the first year would be CGT and then possibly 2/3 of the property would be subject to CGT (assuming 3 bedrooms and tenants shared rest of house.
Yes - lived in it for a year - then for the following 2 years, had 2 rooms rented out, and then moved out claiming the PPOR main residence exemption for the next 8 years.

If they were to sell in this scenario would the CGT impact be 2/3 for the 2 years and the time outside (ie 1 prior and 8 after) would be CGT free?
Reply With Quote
  #20  
Old 19-04-2012, 12:21 PM
Terryw's Avatar
Terryw Terryw is offline
Investor
 
Join Date: Mar 2003
Location: Sydney, NSW
Posts: 2,870
Terryw is a splendid one to beholdTerryw is a splendid one to beholdTerryw is a splendid one to beholdTerryw is a splendid one to beholdTerryw is a splendid one to beholdTerryw is a splendid one to beholdTerryw is a splendid one to behold
Quote:
Originally Posted by matto_ View Post
Yes - lived in it for a year - then for the following 2 years, had 2 rooms rented out, and then moved out claiming the PPOR main residence exemption for the next 8 years.

If they were to sell in this scenario would the CGT impact be 2/3 for the 2 years and the time outside (ie 1 prior and 8 after) would be CGT free?
yes probably like that.
__________________
Terryw
Reply With Quote
Reply

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

Forum Jump


All times are GMT +10. The time now is 08:18 PM.


Powered by vBulletin® Version 3.8.8
Copyright ©2000 - 2014, vBulletin Solutions, Inc.
Copyright © Somersoft Financial Services Pty Ltd