Upgrading your home and want to know if you should keep your former home as an investment property? This is a common question we are often asked and it’s rarely a straightforward decision. As with most financial decisions, the answer is….. it depends.
Let’s take a step back and look at good debt and bad debt first.
Good debt is that which you can get a tax deduction and that has been used to buy assets that grow – think shares and property. This kind of debt works hard to generate income and increase your wealth.
Conversely, bad debt is that which you cannot claim a deduction for (such as your home loan) or that may have been used to purchase an asset that diminishes in value such as a car. Credit cards are another obvious bad debt which can accumulate quickly.
So if you have spent the past 10 years paying down your home mortgage on your existing home and you now wish to go and buy another larger or more expensive property, you are likely to be increasing your non-deductible (bad) debt. If you choose to keep your former home and now rent it out, that lower remaining mortgage will have a lower level of tax deductions available.
It may be a consideration to sell your former property and then when you have some equity in your new home, borrow again to purchase an investment property, thereby maximising the good debt ratio.
However, you must seek advice when considering these strategies as it will depend on a number of factors which include:
Tax – your former home may be exempt for capital gains tax and so be an ideal asset to sell with no tax consequences (you will need to check this with your accountant)
Your time frame – how long till you plan to retire or hold this asset can impact your plan
Passive income – is the debt able to be repaid soon and then form part of your income stream
Your emotions – you may love your former home and want to keep it for emotional or other reasons
As you can see, it really does depend on a large number of issues and seeking advice will help you to understand how they impact your goals and plans.
General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.