How to turn your residence into an investment and back
Some home owners love where they live but have to move because the property doesn’t meet their immediate needs. Whether it be due to relocation for work, wanting to get kids in a particular school catchment zone or simply because the property not meeting the needs of the family.
A move doesn’t always mean that you need to sell your property especially if you want the option of moving back in to the suburb and have the borrowing capacity to afford a new property with the assistance of rental income from your old one.
Naturally, there are several factors to consider, particularly in terms of mortgage, taxes and holding costs. One of the biggest concerns for anyone considering changing their home into an investment property is capital gains tax (CGT) payable if they happen to sell the property.
A valid concern, the Australian Tax Office has a rule that allows you treat your old house as your principle place of residence even when you have moved out. Below is the excerpt from the ATO website which provides the guidelines around capital tax gains (CGT).
“As a general rule, a dwelling cease being your main residence once you stop living in it. However, in some cases you can choose to continue treating a dwelling as your main residence for capital gains tax (CGT) purposes even though you no longer live in it.
Generally, you:
can treat the dwelling as your main residence for:
up to six years if it is used to produce income
indefinitely if it is not used to produce income
can't treat any other dwelling as your main residence for that period (except for a limited time if you're moving house)”.
Once you have decided to move and keep your old home as an investment, there are several ways to ensure a smooth transition and, ultimately, a maximised earning potential.
As daunting as it sounds, most of the possible issues related to transitioning could be minimised if they treat your former primary home as an acquisition of a property investment.
Essentially, considering if the intention to move back after a couple of years is clear, you would do well to refinance the old loan to an investment loan rather than leave it as an owner occupier loan.
By doing so, you will avoid the expenses associated with keeping track of which portion of the loan interest was paid on the investment cycle of the property and also make claiming expense related to that property easier while it was rented.
Finance considerations
1. Maintain a principal-and-interest (P&I) loan: When it comes to investment loans, owners typically don’t like the principle portion as they hope to make a profit through capital growth, however if you want to change that property back to your residence in the future it would be beneficial to keep reducing your debts and ultimately fast-track the growth of your equity in that property.
2. Consider an offset facility: This loan feature can further assist homeowners-turned-investors in managing their finances and keeping the loan balance on transitioning 100 per cent tax deductible once you start receiving rental income for it.
In the longer term, you might be more in favour of having an interest-only facility, but you can effectively be paying principal off it by putting the extra money in an offset facility.”
3. Get your accountants advise: Before you make any changes, talk to a tax professional. They can help you navigate the changing financial structures and tax implications for you.
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This article via Smart Property Investment does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.