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23 Oct 2013

PPOR and Tax

 

Have you ever considered changing your principal place of residence (PPOR) into an investment property? Perhaps you are looking to upgrade or downsize to a home that suits your current situation better; and believe that your best option is to retain the original property as an investment.  Putting aside your reasoning, there are a number of factors that home owners should be aware of when considering the change. numerous factors that homeowners, and subsequent investors, should be aware of when making the switch, especially in regards to tax.  First we must clarify what we mean by ‘principal place of resident’ or PPOR.  The ‘principal place of residence’ can be defined as being the one place of residence that is, among the one or more places of residence of the person within and outside Australia, the principal place of residence of the person. In laymans terms, a person can only have one principal place of residence in the whole world.

The shifting of labels from being a person with a PPOR to an investment property is actualy triggered by your physical relocation to the your new PPOR. Once this has occurred the following tax implications may be of benefit:


Deductions

Interest that is paid as part of the loan repayments for your new investment property become a tax deduction. This deduction can be claimed at a specific rate for the construction costs of the following (seek further advice for a more comprehensive list of deduction items):

·         buildings

·         extensions

·         alterations, such as bathroom renovations

·         structural improvements, such as a new garage

 

Capital Gains Tax

In general any capital gain or loss that is incurred as a result of disposing of, or selling, a PPOR is exempt from any capital gains tax (CGT) obligations.

In some instances at the time of sale of the property, the owner may be eligible for a partial CGT exemption. The two particular circumstances where the partial exemption is applied are:

the property was not used as the owner’s main residence for the entire period of ownership (although in some cases specific absences are allowed, this is discussed further below); and

the property was used for income-producing purposes, while it was the taxpayer’s main residence and if a loan was taken out to purchase the property the taxpayer could have deducted the interest paid on that loan 

 

 Here is an example:

An owner owns and lives in a property for a period of 3.5 years, following which the owner is then forced interstate for employment reasons.  Whilst he or she is away the PPOR is rented out. The owner returns to the property lives in it for a further 2.5 years after which they decide to sell.

In this case, there is no Capital Gains Tax payable upon the sale of the property as the owner never resided in another PPOR for more than six years at a time, and no other property was treated as their principal place of residence during this period.

There are some specific factors that have to be taken into consideration for the six year rule to apply. An example of a specific factor is having an important reason. Some examples of important reasons include accepting a new job interstate or overseas, staying with a sick relative long term, or partaking in an extended vacation.


This advice is not completely comprehensive as there are other financial and tax implications to be considered when transferring a PPOR to an investment.  For further information regarding this, contact Alert Property Group.

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