Maximizing Tax Benefits: The Right Way to Use Equity in Your Home for Investment Properties
By Jeff Banks
We at Property Portfolio Solutions, strongly believe that purchasing investment properties can be a fantastic way to build wealth over the long term. However, it’s essential to use the right strategies when tapping into the equity in your home to fund these investments. In this blog post, I’ll share my thoughts on the right and wrong ways to use equity in your home to purchase investment properties.
First and foremost, it’s crucial to prioritize saving and paying down debt on your own home before considering investing in additional properties. At Property Portfolio Solutions, we advise our clients to place all their money into an offset account against their own home. By doing so, you’ll reduce the amount of interest you pay on your home loan and can use the savings to pay down the loan faster.
Once you’ve built up some equity in your home, it can be tempting to use that equity to purchase investment properties. However, it’s important to be strategic about how you do so. The wrong way to tap into your home equity for investment purposes is to simply take out a second mortgage or home equity loan on your home. This can put your home at risk if you’re unable to keep up with the additional loan payments.
The right way to use equity in your home to purchase investment properties is to contact your bank to rearrange your home loan. This is where the two cells come in. You’ll want to take the funds from the offset and pay down the home loan to the net non-deductible portion. Then, you can redraw the new cell, which now incurs deductible interest because the purpose of the borrowing was to purchase that new investment property. It’s essential to ensure that the bank leaves all offsetting against the non-deductible original home loan.
By following this strategy, you can tap into the equity in your home to purchase investment properties while still protecting your home from unnecessary risk. It’s also important to note that investing in property should be seen as a long-term strategy, and it’s important to have a solid plan in place before making any investment decisions.
As Warren Buffet famously said, “Risk comes from not knowing what you’re doing.” At Property Portfolio Solutions, we believe in taking a strategic and measured approach to investing in property. By following the right strategies and working with a team of experienced professionals, you can build a successful and profitable property portfolio over time.
A most important factor in our view when considering using equity in your home to purchase investment properties are the tax implications and the “rules” that come with it. It’s crucial to follow the rules and structure your investments in a way that ensures the best taxation outcome.
By using the strategy I described earlier, where you split your home loan into two cells and ensure that the offsetting remains against the non-deductible original home loan, you’ll be able to maximize the amount of interest that you can claim as a tax deduction. This can have a significant impact on your overall taxation position.
However, it’s important to note that the rules around tax deductions for investment properties can be complex, and it’s crucial to seek professional advice from a qualified accountant or tax advisor. They can help you navigate the rules and ensure that you’re structuring your investments in a way that maximizes your tax benefits.
At Property Portfolio Solutions, we work closely with our clients to ensure that they’re following the rules and taking advantage of all available tax benefits. By doing so, we can help our clients minimize their tax liabilities and maximize their overall returns.
Using equity in your home to purchase investment properties can be a great way to build wealth over the long term. However, it’s important to follow the right strategies and structure your investments in a way that ensures the best taxation outcome. By working with a team of experienced professionals and seeking qualified advice, you can build a successful and profitable property portfolio that sets you up for long-term financial success.
Our catchcry is “Your legacy is Our inspiration” and our approach based on what inspires you, will make your legacy seem so much easier to achieve. We are easily contacted by going to our website www.propertyportfoliosolutions.com.au where the start or even the continuation of your property portfolio is made simple.
