Some people have made their homes their investment properties and we can not fault them with that. There are several reasons: work relocation, upgrade to a bigger space, and for sentimental reasons – does not want to sell their abode.
But whatever your reason for doing this, know that it is a solid financial judgment when it is done properly. It will provide good returns down the road but it pays to do your homework first.
You need to take into account certain considerations before plunging into this goal – making your home an investment property at the same time. We listed them below for your guidance. Read on:
1. Follow the ‘up to 6 years’ rule.
You may return to your main residence after leaving it. There is the so-called ‘up to 6 years’ rule which will let you have the property rented out for 6 years. You can claim for some charges and leave out paying Capital Gains Tax or CGT if you decide to sell the property.
But if you had the property rented out for six years or more and you try to sell – you will draw a CGT at the present discounted rate on a pro-rated basis during the period the property was considered a rental property.
2. Tax Incentives can be claimed.
The owner is eligible for some tax deductions if you are talking about having an investment property. But if you’ve paid some big amount of money to your owner-occupied property’s debt, and then change it to an investment home property – the result could be negatively affecting your scope.
As in any investment property, the owner is eligible for tax deduction claims. Check this example:
You initially purchased a property for $900,000 mortgage and have made repayments – balance of the loan now is $300,000. Once you turn that property into an investment residence – that $300,000 becomes your tax-deductible debt, not the $900,000 original loan you started with.
3. There are different types of loans to check.
Your mortgage may also have to change if you’re converting you owner-occupied property to an investment property. When you bought your first owner-occupied property, your home loan was set up to cater to your needs at the time of purchase. But as you convert it to an investment property, the mortgage may need to be changed.
For example, it will no longer be beneficial to you when there’s conversion to investment property from being initially an owner-occupied one when your debt is a line of credit.
Why is this so? The key objective of the line of credit is to offset the interest on your owner-occupied mortgage, rather than on your tax-deductible loan.
On the same note, if your current mortgage is one of principal and interest, you may want to change it to the more preferred interest-only debt. This is helpful more so if you’re taking an owner-occupied mortgage on another property you are investing in that’s non-tax deductible.
4. Which one is for you – negatively or positively geared investment?
Last but not the least, you have to take into account whether the investment will operate as a negatively or positively geared one.
If the annual rental income for the property is higher than all the costs and loan repayments for the year, then you are not making a loss, the property is positively geared.
Conversely, in negative gearing, you experience property loss. But these losses are claimable in your tax return which means lowering your income and tagging you to a lower tax bracket.
Considering where your property is geared is particularly important if you own the owner-occupied type of property with either your partner or spouse.
If a property has negative cash flow, for instance, it may only be useful to have only one of either the couple’s names indicated on the title, apparently the one with the bigger income. This means he or she can have the tax claims. As one is paid more, he gets more from the tax returns being in a higher marginal tax rate.
On the other hand, if you made a significant payment for a loan on the property, it may turn out to be positively geared, especially when your goal is to make it as an investment.