Puzzle Finance Blog

Head over heart the best tip

Buy a new place, and rent out the old one? Make sure it is a financially sound move.

Australians have always had a love affair with property. Now, with interest rates at record lows, many people are taking advantage by buying a new home or apartment to live in, but they are also wanting to keep their existing home as an investment property.

What I am hearing as a result are many of the same questions being asked, whether by clients or by friends over drinks on a Saturday night, about what they should be doing with that investment. There seems to be a lot of confusion about what you can claim, what you can borrow and how best to set up your investment to maximise any benefits you might receive.

So here are my standard responses:

■ If you want to keep your existing home as an investment property and buy another place to live in, simply increasing the loan on your existing home will not necessarily give you more of a tax deduction. That's because the tax office looks at the purpose of the borrowing and not the security you are borrowing against. However, if you want to buy carpets, blinds or carry out renovations before you rent out your existing home then increasing your current borrowings to do this may be tax deductible. Advertisement

■ If you have an existing mortgage against your home but you have made numerous redraws for things such as holidays, cars or boats, and you now want to use the loan as a deduction, be aware that not all of the loan may be tax deductible because the purpose of the borrowing was not to buy or improve the property.

The question that I pose in response to people buying a property to live in and wanting to keep their own home as an investment property is: why? Often the loan on the existing home (which will become the rental property) has been paid down considerably, so the property is usually positively geared. The loan on the new home is almost always considerably higher because rather than having a deposit saved, they are using the equity in their existing property to borrow more. None of which is tax deductible.

Which leads back to my question: why keep the original property? Unless you have good reasons to keep it, often it makes better economic sense to sell your existing home, pay down the debt on your new home and then buy an investment property that would now have a higher amount of debt. Yes, there are selling and buying costs to consider but often these are outweighed by the benefits to be gained by having the higher loan with the new investment property and not with the new home.

Often the real reason people want to keep their home and convert it to a rental property when they move is emotional rather than rational. They feel they should, or it was the first home they bought so they don't want to dispose of it. If you can afford to keep it and you acknowledge that you're doing it for an emotional and not a rational reason, then that's fine.

However, owning an investment should be an economic decision rather than an emotional one, so be aware of all the pros and cons above and then make a decision with your head, not your heart.

Of course, if you're still unsure, talk to a professional like your accountant for advice.

Melissa Browne is an accountant, adviser, author and shoe addict.

Read more: http://www.theage.com.au/money/investing/head-over-heart-the-best-tip-20140329-35q6h.html#ixzz2xZPbIdWz

Posted by Melissa Browne - The Age on 30th March, 2014 | Comments | Trackbacks

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