Your Village Mortgage Broker

Property insights

Planning on upgrading your home and wondering whether to rent out your current home?

Author: Rob Farley-Odgers

Date: August 15, 2023

So, maybe your family is getting bigger (or your family members are) and you’re starting to outgrow your existing home. You might be tired of not having enough storage space or need that extra bedroom to accommodate visitors, or display the kids’ growing lego masterpieces! But you love the current place and you’ve spent a considerable amount getting it to be really nice to live in over the years. As a local, you’re also very aware of the area’s recent growth.

It’s a scenario we come across at Your Village Mortgage Brokers quite often. We love this area too and can talk you through some ideas, including the benefits and risks of holding on to your existing home as an investment property when upgrading to a new home.

Investing in property can be a great way to grow your wealth and generate more income. So, if you’re considering whether its possible for you to rent out your current house when buying a new one, there are some key aspects to keep in mind, which we can discuss. Two important ones are:

Rental returns:

Whilst rent received on your investment property increases your taxable income, some expenses including loan interest, maintenance costs and estate agent fees can reduce or ‘offset’ the increase in your taxable income.

If the rent you collect covers all your related costs, including interest on your home loan, then you are said to be “positively geared”. If instead your costs are higher than the rent you receive, you are “negatively geared”. In that case, you may be able to offset those higher costs against your other taxable income, such as salary.

If you are “negative geared” though, your investment property is costing you money. That means that notwithstanding the tax offset (above), your property is costing you more than it earns. In this case, you need to be confident that the increase in the value of your investment property over time will cover those higher expenses and still generate the investment return you expect when you eventually sell.

Capital gains:

Your main home (primary residence) is currently exempt from “capital gains tax”. That means you don’t pay tax on the increase in its value when you sell. But, your investment property is not exempt. Although, you may be eligible for a capital gains tax concession, depending on how long you have your investment property (its “holding period”).

We’d love to discuss these aspects further with you and help you think through other important aspects, which include:

  • Do you have available equity in your existing home?
  • Does your home have “rental appeal”?
  • What are the additional costs (“holding costs”) of keeping my current house?
  • Can I afford my loan repayments if my situation changes?

Just a reminder, we are experts at home loans but we’re not qualified tax advisors. We strongly recommend you obtain advice from a tax expert prior to making any decisions.

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