Do you have a home loan with an offset account or a redraw facility? It’s pretty common to find that property owners with a home loan have one or the other. But if you live in a house that you wish to turn into an investment property in the future, or, at least want to have the option to do so, you need to read this.
If the correct structures have not been put into place, you may blow your chance to turn your home into a tax-effective investment property. One strategy that homeowners employ is to pay their home loans out as quickly as possible and deposit their extra cash into the redraw facility. The house gets paid off quickly and the extra cash in the redraw facility can be redrawn and it could be used as a deposit for another home.
The hiccup here is that, when you convert your home into an investment property, it will have a lower loan balance and then you will have less to deduct from your tax in the future.
There’s more – if you use the money from your redraw facility to buy another home, it is an equity loan and not tax deductable because the funds drawn would be for personal use to buy your new home, not an investment property.
It gets worse, the rent from your initial home may be considerably higher than the interest that you can claim on the loan, leaving you paying tax on the positive cash flow as well as the tax that you pay on your personal income.
Putting this all together, the equity loan from your initial property, plus a new loan, combine to make up a non-tax deductable debt and you have to pay tax on the positive cash flow. It may work out to be better to sell the property rather than keep it as an investment!
Had you chosen to set up the loan with a linked offset account and put the extra cash into that, the initial loan balance would have remained relatively high. Then, converting your house into an investment property, the higher loan would be tax deductable in the future.
You could use the funds in your offset account as a deposit on a new home!