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Property prices are currently flat representing good opportunities for upgraders. While previously the 'ideal home' was too expensive, now upgrading has become a realistic option for more and more people.

Property prices are currently flat representing good opportunities for upgraders. While previously the “ideal home” was too expensive, now upgrading has become a realistic option for more and more people. 

The consideration then becomes – how do you convert your current home into an investment property (and sell later when the market improves)?  More specifically, how do you convert your home loan into an investment loan? Well it is much easier to maximise your tax benefits if you've been operating your home loan using an offset account. As you will see, changing your loan structure can have a significant impact on your tax position so be sure to discuss this with your accountant.

The offset account permits you to keep your original loan balance whilst still getting the benefit of having additional funds work for you to reduce your interest payments. Because the extra funds are sitting in a separate linked account and not directly in the loan account, when you opt to upgrade and purchase your new home, you can withdraw these available funds from your offset account and place them towards the new purchase to cut back on the extent of your new owner occupied debt. At the same time, when you convert what was your home loan into an investment loan, you are able to maintain the original loan balance. This maximises your tax advantages and any negative gearing benefits.

If you haven’t operated your home loan with an offset account, when you do go to restructure your loan - things gets messier and your ability to maximise any negative gearing benefits reduces. If you've been focused and you have payed extra off your home loan, these extra payments have gone back into the loan and effectively scaled back the loan balance. This is a drawback once you go to convert your home loan to an investment loan. If your original loan amount was $300,000 and you paid an additional $100,000 off the loan, at the time when you change this home loan into an investment loan, even if you were to redraw the extra $100,000 (to put towards the new property purchase) the tax deductable portion of the investment loan would remain at $200,000 regardless that that full debt had returned to $300,000. 

Many people assume that an offset account is only needed if you have investment debt. Because we have a tendency to never know what the longer term brings it's much better to set yourself up from the get-go in an approach that will allow you to maximise opportunities in the long run.  Home loans that offer an offset account provide flexibility for an uncertain future.

Last but not least, at the time you relocate to the new property, be sure you get your original home valued and hold onto valuation report! This is important for when you choose to sell the house once the market improves. As this property has been your owner occupied residence you want to ensure you receive the full capital gains tax exemption applicable for the period you lived in the home. Having the property valued at the time you move out, evidences the true market value and helps determine the base cost of the property in the event any future capital gains tax is payable. Be sure to seek advice from your own accountant as to how restructuring your loans may impact your tax position.