Rent it or sell it?

Something I hear from time to time from people ready to buy their next home, whether they buy bigger or smaller, is that they want to keep their current property as an investment. While it isn't impossible it's not always the best idea.

The one thing I always stress is if you're moving, the house you currently own is just a house, it becomes a numbers game overnight. it isn't about your son and daughter being able to walk to school or that you can entertain really well in the property, it's about how badly someone else wants their kids to be able to attend and walk to the school nearby, what improvements are happening nearby with respect to infrastructure such as roads, hospitals, schooling, businesses etc. There is a lot to consider when buying an investment property and it is best to seek advice from a trusted buyers agent to locate a good investment (a good buyers agent not a property spruiker, that's a whole new conversation).

Some reasons that argue selling is the best way to move forward;

If you sell your owned occupied house you pay no capital gains tax. At present you can sell the house you live in and not need to pay CGT. If your property is an investment however the tax treatment changes. You could be liable to pay 50% CGT. Contact your accountant for advice but the general rule of thumb is if you lived in the property for 5 years and leased it for 6 years you will be liable for some CGT.

‎If your house has just experienced a good growth run historically this would suggest house prices in that area will stall or retreat slightly. As is currently being seen in the majority of Sydney markets house prices are "correcting". They're re-establishing themselves to the revised demand from buyers.

The percentage of your loan that can be claimed as a tax deduction will be less than if you cleared the mortgage from a sale and purchased another property as an investment. There's a couple of layers to this. If the property you currently live in is worth $600,000 and the mortgage is $200,000. You can't increase the mortgage to $480,000 and claim the interest charges on $480,000 if you use the extra $280,000 as a deposit for your new home. This is because the purpose of the funds is for an owner occupied house where no deductions are able to be made, you could only claim interest charges on the original $200,000 outstanding balance. If you sell however you can potentially borrow 100% of the funds for an investment property and all of the interest charges accrued for that property would be tax deductible.

As you can tell there are many facets to this decision and it is best to discuss this with people who you trust and understand the situation, your accountant, financial planner and a broker with investment property experience are great places to begin.