Purchasing a home is a significant milestone.
If your first home is a stepping-stone home, strategically planning for its future transition to becoming an investment or selling to upgrade is vital if you want to optimise your long-term tax deductions, minimise the potential for capital gains tax and reduce the interest payable on your future home.
This planning needs to start BEFORE you purchase your first home, because your mortgage strategy is a key component.
This approach can help young buyers maximise their financial potential while maintaining flexibility in their living arrangements.
In this blog, we explore the benefits and implications of switching a property from owner-occupier status to an investment and then back again.
Government Schemes: A Launchpad for First-Time Homeowners
Securing your first property is an impressive achievement in life. Currently there are a myriad of Government schemes to leverage when taking this step, such as the First Home Buyer Scheme, which will (if you are eligible) waive Lenders Mortgage Insurance (LMI) and provide access to lower interest rates.
Initially planning to live in the home, make extra repayments and building up equity is the time honoured strategy.
However, it’s not uncommon to reconsider and decide to rent out the property after the mandatory one-year occupancy period, to accelerate savings and debt reduction if you have a cheaper living option.
Living with parents can be a significant advantage, allowing you to save more efficiently.
Additionally, renting the property can provide steady surplus income, which can be funneled into an offset account, further reducing interest payments and building equity so you preserve tax deductions and build up cash for the future home or renovating and extending the current one depending on your Property Plan.
Navigating Capital Gains Tax: A Major Advantage for Owner-Occupiers
One of the main advantages of purchasing the property as an owner-occupier first is the capital gains tax (CGT) benefit.
When the house is your principal residence, which it qualifies as if you move in at settlement, it remains CGT-free if sold.
This is the case even if you move out for a period, if you move back into the property within six years and do not purchase another home to live in during that time.
This exemption can result in significant tax savings if you decide to sell the property in the future.
If the property had initially been purchased as an investment, it would always have a proportion of CGT payable based on the duration it served as an investment.
By starting as an owner-occupier, you can eliminate this potential tax burden, ensuring the property remains CGT-exempt under the principal residence exemption.
Financially Savvy Renovations: Boosting Property Value and Savings
As an investment property, certain renovation expenses can be tax-deductible and these tax benefits should be taken into consideration, particularly if you have purchased a property with a plan of making some improvements.
Renovations provide an opportunity to improve the property’s value while benefiting from tax deductions, making renovations more financially manageable.
This approach can be advantageous if you have purchased a property with potential for extensions and renovations, allowing it to better meet your long-term needs from an investment perspective or if you plan to move back into it down the track.
Want to Learn More?
Don’t miss out on this episode where the Property Trio tackle a real life example of changing property purpose from owner occupier to investment and back again, breaking down the critical considerations.
Listen to the Property Trio podcast
Take a listen to these episodes for more in-depth insights on planning to change property purpose and aligning your mortgage strategy with your financial and lifestyle goals.
#22 – Why the family home is often the biggest piece of the investment puzzle
Reach Out to Us for Expert Advice
Switching a property’s status from owner-occupier to investment and back can offer substantial financial benefits when done correctly. However, your unique circumstances and goals must be considered as part of your overall property plan before determining the best strategy for you.
Schedule a meeting with us to discuss your mortgage strategy, plan your next purchase, refinance your existing loan, or develop a comprehensive Property Plan aligned with your objectives.
