Moving From One PPOR To A New PPOR

Sorry to any international readers but this post is particularly for the local readers in Australia.

What is a PPOR? A PPOR is the acronym for Principal Place of Residence. The Australian Tax Office (ATO) has various capital gains tax free arrangements for PPORs depending on when you moved in, when you moved out, when it was sold or how long it has been rented out for.

A friend of mine recently bought a new PPOR home. His previous house is going to be rented out when he moves into the new one. These actions have several tax implications.

If you find yourself in a situation where you've outgrown your current house, need to buy a new one and move into it but still wish to retain and rent out your old home, then there are a few crucial steps to take.

These steps help to ensure that you can minimise the potential income tax payable while the old property is rented and the capital gains tax payable later down the track should the ex-PPOR be sold.

The Three Scenarios

1) PPOR are capital gains tax free if you buy, move in and then sell and move out. Any price appreciation on the PPOR is tax free.

 2) However, if you buy, move in, move out and then rent the property without nominating a new abode as your PPOR(so you are renting your new residency), then the property can be rented out for 6 years before capital gains tax is payable on a pro rata basis.

3) If you buy a new PPOR house, move out of the ex-PPOR house and turn that ex-PPOR into a rental property, then capital gains tax is payable on the price appreciation on the ex-PPOR the moment it is a rental property and there is no 6 years of rental grace with regards to capital gains. Income tax is payable on all rental income, expenses for running and maintaining the property becomes deductible and various items and expenses becomes depreciable.

When You Turn The Old PPOR Into A Rental Property

This is a crucial moment for a few important steps to be taken if you wish to save yourself a lot of taxation headaches.

1) The moment that you move out, engage a professional property valuer to value your old PPOR before it is rented out so that any property price appreciation that the property has experienced thus far is capital gains tax free and you will only be taxed capital gains on any price appreciation once the property is available for rent.

2) Engage a Quantity Surveyor to provide you with a property depreciation schedule which consists of two parts:
       A) Capital Works Allowances which is depreciation on the construction cost of the building(items such built ins, kitchen cupboards, floor tiles, clothes hoist, toilet bowls and tubs) if the residential building was built after 18 July 1985. For applicable residential properties, refurbishments and renovation works are also deductible. Capital Works Allowances also applies to any structural improvements such as fencing, paving, pergolas, garden sheds etc that have been constructed after February 2002. 
       B) Plant And Equipment Depreciation covers items such as carpets, curtains, washing machines, stoves and hot water tanks for example.

Both Capital Works Allowances and Plant And Equipment Depreciation will be applied to reduce your rental income and thus, your income tax.

These are a few important steps that can save you thousands of dollars of income tax annually and should you sell the old-ex-PPOR in the future, potentially save you thousands in capital gains tax as well. And just when you thought relocating all the furniture was the hardest part...