Hi, today I want to talk to you about the importance of your property strategy and goal setting or working out what you’re going to do with your property. So we often have conversations with our clients who ask us about, how do we turn a positively geared property into a negatively geared property?
So we often have people who come to us and say, Look, I’ve bought a property, lived in it, and very diligently, paid off the loan as quickly as possible, because that’s often how we’re taught and what to do with our debts in general, whether they’re good or bad. And then they’ve bought a property, they’ve got a loan, they’ve paid it down over time, and then eventually they want to go and buy the next property. So they want to upgrade the family home, move to a bigger place, move to a different city. They want to hold on to this property and turn it into an investment property.
So at that time, they might come to us and say, Well, you know, we won’t buy the next property, but we’ve paid off this loan as well, so we also don’t have enough cash to cover the deposit plus costs on the new purchase. So they take out their loan there, but to cover the deposit plus costs, we need to go and take out some equity in the existing property and use that to cover the deposit plus cost there as well.
They then say, well, because we’ve paid off this loan so well, now the net rent is going to cover the repayments on this new investment loan. So they’re in a position where the property is now positively geared. Now, depending on what tax bracket you’re in, if you’re positively geared, you’re going to pay tax at the end of the year.
Now, if you’re in a higher tax bracket, you want to be doing everything possible to minimize your tax, not increase it. So having a positively geared property isn’t necessarily a great thing. Again, depending on your tax bracket and what your overall strategy and objectives are, but they’ll often ask if this loan here because it is secured against the investment property, if that can be claimed as an investment loan. Now the short answer is no.
The ATO doesn’t care where the property or the loan is secured against. What they care about is what you use the loan for. So in this instance, they’ve used it to purchase a new home, not an investment property. And therefore this loan, the interest, is non deductible. So effectively, it’s bad debt, because it’s not, you know, getting you any kind of tax benefit. So what they’ve done is they’ve actually reduced their good debt, the deductible debt, and they’ve maximized their non deductible debt or their bad debt, and on top of that, they’re potentially going to have a tax issue at the end of the year as well.
So it’s really, really important in terms of strategy and goal setting, that before you even buy this property, or at least before you buy the next property, that you sit down and you discuss with someone like myself or your financial advisor or your accountant, what you’re going to do with that property. What are you going to do in the next 5, 10, 15 years? Is there any possibility that it will become an investment property? If so, it’s really critical that you get the loan structure right at the beginning so that you can avoid this issue here, because it can cost you 1,000s of dollars, and we’ve seen it happen a few times. If you do want to discuss this kind of scenario with us, we’re always free to chat. So happy to talk.
Thanks.
