30 Aug 2018

Should You Sell Your Home and Upsize or Keep it as an Investment?

When you’re a homeowner considering property investment, it may seem like an easy choice to hang on to your current home as an investment. This can be a common dilemma when deciding what will give you the best financial outcome.

Should you sell and move or keep your current home as an investment property, or should you sell and move on? It’s a common question and there is no true ‘right’ answer, only what is best for you.

There are various financial factors you are advised to consider when making this decision including:

Capital Gains Tax (CGT)

If you keep your home as an investment property, when you do end up selling it for more than the purchase price, you will be required to pay CGT.

You will not need to pay any tax on the capital gained on your existing, owner-occupied home (your main residence), when you sell.

Tax-deductible debt vs. Non-tax-deductible debt

Interest charged on your owner-occupied home is not tax-deductible. On an investment property, interest charged on your mortgage, maintenance costs and fixtures are tax deductible. If you use the equity in your current home to buy your next home, while keeping the current home as an investment, that portion of the mortgage is not tax-deductible, even though it is secured against what is now your investment property.

Case Study

Jane is looking to move, and her currently property is valued at $900,000. She owes only $100,000 on her mortgage. However, she wants to hang on to her property as an investment because it’s her family home, she loves it and thinks it will provide a great income for her, and if she ever decides to move back in, she can. Jane finds a new property she wants to purchase and move into for $1,000,000.00. She’s weighing up the options of whether to keep or sell the existing property when she moves.

Here are two possible scenarios:

If Jane decides to keep the first home

Jane borrows $800,000, which is 80% LVR (loan to value ratio) using $200,000 equity from her now investment property, to avoid paying the Lenders Mortgage Insurance premium.

So even though there is now:

  • $100,000 (original debt), plus $200,000 (debt for new home) which equals to $300,000 debt secured against the now investment property, only the original debt of $100,000 is tax deductible.
  • Jane will have a debt of $800,000 where the interest is not tax deductible.

When Jane does come to sell the investment property, she will have to pay CGT on the amount of capital gained – if she bought the property at a low price and sold for a high price, this could be quite a substantial tax.

If Jane decides to sell the first home

If Jane sells her current home for $900,000:

  • she will be left with $800,000 (after paying off the $100,000 owed on her mortgage).
  • This $800,000 would be exempt of capital gains tax and ) to put towards her new home purchase.
  • She would only have a non-tax deductible mortgage of $200,000 ($1,000,000 purchase price – $800,000 cash) leaving $800,000 of equity she could use for appropriate investments.
(This is only an example to illustrate two possible scenarios and does not take into account interest rates, or any selling and buying costs into consideration.)

After looking at the two options above, you will realise that more often than not, selling your family home to buy your next could likely give you the best financial result. Of course, it does not mean that keeping your original home as an investment is the wrong path to take – if you are leaning towards this option, you should take a look at whether your property is suited to tenants – it may have been great for you, but is it for other people?

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.

But don’t worry, we can help with that.

If you’re thinking of selling your home and are ready to make the next move buying or investing, you can contact us for information about the best options for you when it comes to your mortgage.

Click here to speak to us!

Fast track your home loan
Apply Online Book a Call Back
133 144

Why Choose Mortgage House?

Award Winning