House with hands
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  • Worth considering is shifting to a more affordable location
  • Selling and buying a new home can reduce mortgage size
  • Be careful of tax implications if borrowing against your home

One of the most common queries we get from homeowners looking for property investment advice is, “Should I sell my home or should I keep it as an investment property?”

As any property specialist will tell you, there is no single right or wrong answer to this, because buying an investment property really depends on a variety of factors, including the individual circumstances of the property buyer.

When you’re looking for a home to live in, it’s common that you could see a house for sale that you fall in love with.

In fact, having an emotional response to an owner-occupied property seems natural, as most people really want to like where they’re going to live. That makes sense.

This is quite a different approach to buying an investment property, which is more of a business decision involving the rental yields and economic fundamentals of an area or suburb.

Why would you keep your current home?

Well, the number one reason would be an emotional attachment. Something in our thinking tells us, “Well, if I like this property, everyone else should, too”. This seems to be a common trend.

An analysis of quantity surveyor reports prepared by BMT Tax Depreciation indicated that 22 per cent of their schedules were for primary places of residence (PPOR) which the owners turned into an investment property.

One logical reason to turn your home into an investment property would be if you were temporarily relocating for work reasons or perhaps exploring other lifestyle options.

An example of this is the sometimes romantic notion of sea change and tree change, where people usually aim to leave the stresses of city life to wind down to an easier pace, or to enjoy more of a holiday lifestyle.

The wise thing to do for people considering such a change in lifestyle would be to keep their current home (and rent it out) and then rent a property in the new location to see if they like it.

Over the years we’ve heard stories of people selling up in expensive areas like Sydney, buying in a quieter location and discovering that the lifestyle was not what they thought, or there were limited employment opportunities.

In the meantime, property prices where they originally lived increased and supply tightened, to the extent where they couldn’t afford to buy real estate back in the same area where they lived before.

What about if you’re not moving elsewhere?

So, what about the majority of people who are thinking about keeping their existing home as an investment property and want to buy their new home in the same city or town?

Well, if there is no debt involved and extra funds aren’t needed for the new PPOR, it could work, but this is not so common.

Most people with a home have a mortgage, and loan repayments (including interest) is the biggest expense of many Australian households.

If you pay a significant amount of debt off your existing home, keep it as an investment property and need to borrow much more for the new home, then your loans will end up being “upside-down” for tax purposes.

This is because the interest on the smaller existing home loan will end up becoming tax-deductible, whereas the larger new home loan will not be tax-deductible.

So, should you keep your existing home as an investment property if you’re borrowing to buy a new home in the same city or town? Nine times out of 10 the answer is no.

The logical approach from a tax perspective would be to sell your existing home to minimise the debt on your new home.

You could then borrow to buy an investment property in the future and the interest on that new investment property loan will be tax-deductible.

People also often hesitate about making decisions to buy multiple properties and want to hang on to an existing property because they don’t want to pay the extra stamp duty. But this is a false economy.

The amount of capital gains lost over time because of the decision to “save stamp duty” is significant and will hurt in the long run.

And so will the decision to keep an existing home and turn it into an investment property because people assume it’s a good investment area, all property will grow eventually, right? Wrong.

You must take good advice and you must be honest with yourselves when assessing the wisdom of keeping a property you’ve lived in and turning it into an investment. Just because you loved it doesn’t always mean that everyone else will.

Your existing home is usually exempt from capital gains tax if you sell it as well, so you should discuss this and any other tax implications of keeping your home as an investment property with your accountant.

Unfortunately, our choices aren’t always based on logic, especially when it challenges our emotional instincts.

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Before investing in any asset, please do your own independent research, taking into account your own personal financial situation. This article does not purport to provide financial advice. See our Terms of Use.

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