Turning your home into an investment property

There are times in life when turning your home into an investment property might be a great option. If you need to move interstate or overseas for work but don’t want to sell your home, or you want to upgrade but hang on to your existing property. Whatever the reason, you need to know it’s the right choice for you now and in the future.

Is it the right financial choice for you and your family?

If you’re moving because you want to upgrade your home, you need to ask yourself some questions.

Will your existing property make a good investment property?

Just because you love your home doesn’t mean others will. Is it in the right location? Is there demand for rentals in your area? Will it bring in the amount of rent you need to cover your existing mortgage? Do you need to do any maintenance or renovation work before you can rent it out?

Weigh up the costs and benefits and decide if you should hold on to it or sell up and invest somewhere with a more sustainable rental profile.

Is it a smart tax decision?

If you’ve paid off a lot of your mortgage and have good equity, it might not make sense to use your old home as an investment. While you can access the equity to buy your second property, the interest on your new mortgage won’t be tax deductible. You’ll be claiming a tax deduction for the smaller debt on your investment property – ideally it should be the other way around.

If you never plan to move back into your old home, it may be subject to Capital Gains Tax when you sell it later on, which makes this option even less cost effective.

Tip: CGT is calculated based on how much an asset (like real estate or shares) cost you to buy and how much you sell it for. If you make a profit, this is added onto your taxable income and the CGT becomes part of your income tax.

Capital Gains Tax and the six-year rule

You don’t pay Capital Gains Tax (CGT) on the sale of your principal place of residence (usually your own home), but you do on an investment property. The six-year rule allows you to use your home as an investment for up to six years before you incur CGT.

This is good news if you rent out your home while temporarily living somewhere else. You can leave and come back without worrying how it affects the CGT-free status of your home. No matter how many times you move, as long as you return to live in your home within that six years, it resets the six-year rule. Forget making five-year plans, switch it up to six.

Negative gearing incentives

If you haven’t paid a lot off your existing mortgage, you stand to benefit from higher tax deductions on your investment through negative gearing.

Your property is negatively geared when it incurs a loss rather than making money. Claiming those losses in your tax reduces your taxable income so you pay less tax.

Having a negatively geared investment offers other opportunities – improvements you make to the property may be tax deductible, so you can increase the value of your asset without incurring unmanageable debt.

Things to consider about your loan

When you buy a property and take out a home loan it’s structured in a way that meets your needs as an owner-occupier. If you want to turn your home into an investment, it might mean changing to an investment loan.

As an owner-occupier, you may have a line of credit set up so money in your account offsets the interest on your mortgage. This won’t operate in the same way for a tax-deductible debt on an investment.

Most home owners choose to take out a principal and interest loan, so eventually they pay out the entire loan. Depending on your financial situation, you may want to change this to interest-only at the start of your investment, especially if you are buying another home that will be your main place of residence.

It’s a good idea to get advice from a financial planner before making any big decisions. What seems to suit right now needs to be flexible enough to work with any change in plans.

We’re here to help

If you’re thinking about turning your home into an investment, take a look at our free property reports and talk to our financial planners about the moves to suit you now and in the long-term. 

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