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Upgrading to a new home? From home to investment

Upgrading to a new home? Holding onto your existing property and converting it to a rental investment can be a smart move.

Four years ago Andrew Gerard decided he’d outgrown his apartment in Sydney’s popular inner west. But rather than selling the property to fund a new home, he held onto it as an investment property.

It’s a decision Andrew doesn’t regret. “I realised the unit had lots of tenant appeal, and the suburb was experiencing tremendous capital growth. So I used the cash I’d saved in my mortgage offset account as a deposit on a new home and rented out the unit.”

He adds, “I can claim the interest on the unit mortgage as a tax deduction. Coupled with the rental income it generates, the property almost pays for itself.”

Along with loan interest, landlords can claim a variety of expenses associated with a rental property as a tax deduction, such as insurance, rates, strata levies, maintenance and repairs, land tax and so on.

On the downside, when a property changes from being your home to a rental property, it loses its exemption from capital gains tax (CGT). As far as the Tax Office is concerned, we can only own one home – or ‘principal place of residence’ at any time. Once you’ve rented out an old home and purchased a new one, the former becomes subject to CGT if you sell further down the track.

There are some exceptions to this rule, so it’s important to discuss this and other aspects of property investment with your accountant or tax adviser.

Without the proceeds from the sale of an existing home, you will need sufficient savings to cover the purchase costs of your new home such as deposit, stamp duty, legal fees and so on. It’s also important to be confident that your budget can cope with rental vacancy periods and possible interest rate hikes.

An equally noteworthy consideration is finding the right loan to finance your property plans. A number of loan options are available, and it’s an area where your mortgage broker can provide specialist advice.

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