How to convert a family home to an investment property (or vice versa) - a workaround

In Pathfinder, if you follow the instructions, below, it is possible to:

Convert an existing investment property to a family home (provided that they will not be eligible for the Age Pension when it is their home)
Convert an existing family home to an investment property

You should note that:

If the property will be sold in the analysis, then you also will need to calculate the percentage of the CGT exemption yourself
Since these changes are made in the 'Current situation' step, instead of the 'Goals' step, if you would like to run multiple scenarios (e.g. no conversion vs conversion, conversion in 2 years vs conversion in 5 years), then you should get results for the first scenario, then make a copy and change the data (note that if you would like to re-run the first scenario, you will need to adjust the data again).

These options are only part of the Optimo Financial SDS:

Convert an existing investment property to a family home and include property as a family home for the purposes of their Age Pension assets test estimate
Purchase an investment property and then later convert it to a family home
Purchase a family home and then later convert it to an investment property

Instructions

The general steps are:

Decide which year the conversion will happen
Add the property as an existing investment property (regardless of whether it starts as a home or investment property)
In the year the conversion happens, adjust the the fields which control the tax status, expenses and income (see below)
Be aware of how this is presented in the results (see below)

For specific instructions:

Convert an existing investment property into a family home

If you would like to turn an investment property into a family home then:

	Step	Instructions
1	Decide in what financial year the conversion should happen	In the instructions below, Pathfinder will assume the property turns into the family home on 1 July of the specified financial year.
2	Enter and adjust their current living arrangements (i.e. another home or rent)	If they currently own another home that they will sell once they move into the investment property: Enter this home as a Family home (at the Current situation step) At the at the Cash flows & Goals > Review Assets & Loans step, for the Sale options field, choose In specified year and then for the Sale year field, set put the year you'd like to change it to an investment property. If they are currently living in rented accommodation, then: At the Cash flows step, enter the rent as an expense. Use the series builder to make sure that the rent is applied in the correct years (for an example, see How to stop a value in the series builder).
3	Add the property that will be converted to the family home as an Existing Investment property	For more, see Investment Property
4	On the property that will be converted to the home, stop the rental income (this will no longer be received when the property becomes a home).	At the Current situation > Assets & loans step, on the form for the property, find the Rent field, and decide whether the rental income should be a dollar value or calculated as a percentage: If you cannot see this field, check that you have entered the property as an Investment Property and not a Family Home. For the % or $ field, open the series builder In the first year of analysis, enter the rental income (If the conversion is happening in the first year, skip this step) In the year the conversion happens, put zero (this will then add zero for each subsequent year as well) Click here to see an example... In this example, the rental income is 4% of the property value, and the property will become the family home on 1 July in the 3rd year of analysis (2019/20), so the series builder should look like this:
5	On the property that will be converted, stop the running expenses (this will no longer be paid when the property becomes a home)	Examples of running expenses include council rates, strata fees, and property management fees (but not loan repayments): Find the Running expenses field, and decide whether it should be a dollar value or calculated as a percentage For the % or $ field (as required), open the series builder (If the conversion is happening in the first year, skip this step) In the first year of analysis, enter the running expenses for the property. In the year the conversion happens, enter the running expenses for the home: You can put zero for this field if the home running costs are specified elsewhere (e.g. if they already own a home and the running expenses for their home are already lumped in with their annual living expenses). The running costs may also be same as for the investment property Note that the tax status is controlled with the 'Costs deductible' field (explained below) Click here to see an example... In this example, the running expenses are $5,000/year, and the property will become the family home on 1 July in the 3rd year of analysis (2019/20), so the series builder should look like this:
6	On the property that will be converted, stop the depreciation (this is no longer relevant when the property is a home)	Find the Depreciation field (this is in the Advanced options section), and decide whether it should be a dollar value or calculated as a percentage For the % or $ field (as required), open the series builder In the years the property is an investment property, enter the depreciation value (If the conversion is happening in the first year, skip this step) In the year the conversion happens, put zero (this will then add zero for each subsequent year as well) Click here to see an example... In this example, the depreciation is 1.2% of the property value, and the property will become the family home on 1 July in the 3rd year of analysis (2019/20), so the series builder should look like this:
7	On the property that will be converted, adjust the Capital gains exemption field (if the property will be sold) The property is not exempt when it is an investment property and is exempt when it becomes the family home.	Find the Capital gains exempt % field (This is in the Advanced options section, under the Tax status heading) If the property will not be sold, you can leave this field as '100' (or if you do not mind overestimating how much CGT will be paid) If the property will be sold, check the ATO (e.g. go to www.ato.gov.au and search for 'Main residence CGT') to work out the correct value for the year the property is sold and enter it in the appropriate year.
8	If there is a mortgage on the on the property, adjust the Tax Status. The mortgage is tax deductible when the property is an investment and is not tax deductible when it's the family home.	Go to the Secured Loan Find the Percentage deductible % field (in the 'Tax status' section) Put '100' in the first year of the analysis (if the conversion is happening in the first year, skip this step) In the year the conversion happens, put '0' Click here to see an example... In this example, the property will become the family home on 1 July in the 3rd year of analysis (2019/20), so the Percentage deductible % field should look like this: 5. You may also wish to adjust the interest rate.
9	Understand how the conversion will be presented in the results	See How the conversion is represented in the results.

Convert an existing family home into an investment property

	Step	Instructions
1	Decide in what financial year the conversion should happen	In the instructions below, Pathfinder will assume the property turns into the family home on 1 July of the specified financial year.
2	At the current situation, add the home that will be converted into the investment property as an Investment property	For more, see Investment Property. Even though the property starts as a Family home, it is important to add it as an Investment property, as this allows the appropriate fields to be displayed when the conversion happens.
3	On the property that will be converted, start the rental income (this will start being received when the property becomes an investment)	Find the Rent field, and decide whether the rental income should be a dollar value or calculated as a percentage: If you cannot see this field, check that you have entered the property as an Investment Property and not a Family Home. For the % or $ field, open the series builder In the first year of analysis, enter zero as the rental income (If the conversion is happening in the first year, skip this step) In the year the conversion happens, put the rental amount (this will then add the amount for each subsequent year as well) Click here to see an example... In this example, the rental income will be 4% of the property value, and the property will become an investment on 1 July in the 3rd year of analysis (2019/20), so the series builder should look like this:
4	On the property that will be converted, start the running expenses (this expense will start when the home becomes an investment property).	Examples of running expenses include council rates, strata fees, and property management fees (but not loan repayments): Find the Running expenses field, and decide whether it should be a dollar value or calculated as a percentage For the % or $ field (as required), open the series builder (if the conversion is happening in the first year, skip this step) In the first year of analysis, enter the running expenses for the home: You can put zero for this field if the home running costs are specified elsewhere (e.g. the running expenses for their home are lumped in with their annual living expenses and will be the same when they purchase their new home). The running costs may also be same as for the investment property Note that the tax status is controlled with the 'Costs deductible' field (explained below) In the year the conversion happens, put the expected running expenses of the investment property (e.g. agent's fees, council rates, water, strata fees, but not loan repayments). This will then add the expense for each subsequent year as well, you can also choose to index the amount. Click here to see an example... In this example, the running expenses are expected to be $5,000/year in present values, and the property will become the family home on 1 July in the 3rd year of analysis (2019/20). We will also assume the running expenses to increase by CPI so the series builder should look like this (note the 'Indexed value (annual)' row is based on the indexation starting from the reference year of 2017/18):
5	On the property that will be converted, start the depreciation (this should start when the home becomes a property).	Find the Depreciation field (this is in the Advanced options section), and decide whether it should be a dollar value or calculated as a percentage For the % or $ field (as required), open the series builder In the first year, enter zero (If the conversion is happening in the first year, skip this step) In the year the conversion happens, put the depreciation value Click here to see an example... In this example, the depreciation is 1.2% of the property value, and the family home will become an investment on 1 July in the 3rd year of analysis (2019/20), so the series builder should look like this:
6	On the property that will be converted, adjust the Capital gains exemption if the property will be sold. The property's exemption from CGT will change when it becomes an investment.	Find the Capital gains exempt % field (This is in the Advanced options section, under the Tax status heading) If the property will not be sold, you can make this field '100' (or if you do not mind overestimating how much CGT will be paid) If the property will be solve, check the ATO (e.g. go to www.ato.gov.au and search for 'Main residence cgt') to work out the correct value for the year the property is sold and enter it in the appropriate year.
7	On the property that will be converted, adjust the Costs deductible field. The running costs are deductible when it is an investment property and are not deductible when it is a family home.	Find the Costs deductible % field (This is in the Advanced options section, under the Tax status heading): Open the series builder Put '0' in the first year of the analysis (if the conversion is happening in the first year, skip this step) In the year that the conversion happens, put '100': Click here to see an example... In this example, the family home will become an investment on 1 July in the 3rd year of analysis (2019/20), so the Costs deductible % field should look like this:
8	On the property that will be converted, adjust the income assessable field. The income will start being assessable when the property becomes an investment	Find the Income assessible % field (This is in the Advanced options section, under the Tax status heading): Open the series builder Put '0' in the first year of the analysis (if the conversion is happening in the first year, skip this step) In the year that the conversion happens, put '100' (this will also put '100' on every subsequent year): Click here to see an example... In this example, the family home will become an investment on 1 July in the 3rd year of analysis (2019/20), so the Income assessable % field should look like this:
9	If there is a mortgage on the property that will be converted, adjust the Tax Status. The mortgage is tax deductible when the property is an investment and is not tax deductible when it's the family home.	Go to the Secured Loan Find the Percentage deductible % field (in the 'Tax status' section) Put '0' in the first year of the analysis (if the conversion is happening in the first year, skip this step) In the year the conversion happens, put '100' Click here to see an example... In this example, the property will become the family home on 1 July in the 3rd year of analysis (2019/20), so the Percentage deductible % field should look like this: 5. If the loan interest rate will be changing, you can use the series builder to adjust the Interest rate field for the relevant year
10	Enter their living arrangements after the property is no longer their home.	If a new home will be bought, make sure it is entered in Pathfinder (for more on adding a new family home, see Family home) If the individuals will be moving into rental accommodation, enter it as an expense (In Cash flows & Goals > Cash flows), and use the series builder make sure that the rental amount is applied in the correct years (for an example, see How to stop a value in the series builder)
11	Understand how the conversion will be represented in the results	See How the conversion is represented in the results.

How the conversion is represented in the results

In the results, although the calcualtions will be correct, the explanation of the conversion may not be as detailed as you require:

Assumptions:
- The assumptions will be listed under the investment property only
Strategy summary:
- The property will be listed as an investment property for the whole analysis
Action items - Pathfinder will not create any action items for the conversion, so you may wish to add an action item such as:
- Move out of your home, (property name), and rent it out as an investment property. This means that you will start receiving rent on the property and will pay running expenses. Furthermore, the loan repayments will be tax deductible.
- Move in to (property) name and use it as your family home. This means that you will no longer receive rent on the property or pay running expenses. Furthermore, the loan repayments will no longer be tax deductible.
Detailed reports:
- The property will be listed as an investment property in the detailed reports, even in the years it is a family home