It’s a new year and with it comes new opportunities – you’ve been made a job offer which means you’ll need to relocate. Or maybe you’re thinking of downsizing or upgrading and you’re wondering if your current home could be used as an investment property.

So what should you be considering? Interest is a tax deductible item on an investment property, so you want to make sure you’re best placed to take advantage of this benefit.

Here are some points to ponder if you’re thinking of turning your current home into an investment property.

Do Your Homework

Depending on what you want from your property investment, it is generally in your financial interests to have a larger debt on your investment property loan than on the loan for the house you’re living in. That way you’ll be paying more interest on the investment property loan, which is tax deductible, than the non-tax deductible debt on the loan for the house you’re living in.

Do your sums to see what suits you best.

Looking at Loans

When you bought your home and took out a loan, it suited your needs at the time; the chances are the mortgage was structured so you paid the loan off quickly. However, it may be within your financial interests to change the loan for a different type now that you’re not going to live in the property.

As interest is a tax deductible item on an investment property, consider changing the loan into an interest only one and make other arrangements for paying off the loan.

If you’re taking out another loan for the house you’re living in, it’s probably better to pay off more of that loan first rather than the loan on the investment property. That way, you can keep claiming the interest of the investment property against tax, while watching the loan on the property you’re living in decrease.

To Profit or Not

You may have read or heard about ‘gearing’. The term gearing simply means borrowing money to invest. When it’s used in a property context, positive gearing is when your annual rent covers all your costs (which includes property management, interest and maintenance) and you make a profit. You will need to include any gains from the investment property in your tax return, and you will need to pay tax on this profit.

Negative gearing is when the annual rent doesn’t cover the costs and you are operating at a loss. That loss can be included in your tax return and you can claim this loss against tax.

Tax benefits for couples

Once you’ve worked out whether you want your property to make a profit or a loss, if you are a couple, it may also be in your interests to have the property in one person’s name.

For instance, if the property makes a profit, it may be better if the investment property is in the name of the lower income earner as tax will need to be paid. If the property is working at a loss, it may be better if it’s in the name of the higher income earner who can then claim the loss against their tax.

Capital Gains Tax

At this stage capital gains tax isn’t really a concern because you’re not selling the property, however it maybe something to consider in the future, particularly if you’re planning on returning to live in the house within six years.

Capital gains is when the sale proceeds of the property are more than what you bought the property for. So, when you sell an investment property, you will need to declare this to the tax office and pay tax on the profit.

Therefore it is important you have the house valued at the time you decide to turn it into an investment property.

However, there are some exemptions. For instance, the tax office will allow you to rent out your house and make claims for income and expenses, but if you’re still treating it as your main residence (for instance if you’re planning on working overseas for a couple of years), you may avoid paying capital gains tax.

Changing your home into an investment property isn’t actually that hard if you consider all aspects. Once you’ve decided to use it as a property investment, speak to us and we can advise on property management solutions.

We always recommend you speak to a financial specialist who will be able to advice you on your individual situation.