Owning your own home

November 3, 2008 by  
Filed under Money Space

This month’s theme is “home”, a term that is dear to everyone’s heart.

From a financial perspective it is seen by many of us as an important part of our financial and emotional security. It is said that most Australian’s have a love of all things property. In the main that is true, so it is important to review some concepts about home related issues.

Firstly, in most cases (here in Australia) your home (principal place of residence) is not subject to capital gains tax if you sell it at a profit. Unfortunately, interest on home loans is generally not a tax deduction and nor is the normal expenses like rates, repairs etc associated with ownership.

If we accept that the family home is a reservoir of future tax sheltered wealth, then it makes sense to develop it to a point where it can be sold to invest in a potentially more valuable home (and the process starts again) or used as security for borrowing to diversify into other investment assets.

Some things to remember though, be careful not to over-capitalise on the cost of the home, and understand how much interest and other costs are associated with home ownership, purchase and sale. Remember the profit when you sell your home needs to take into account all it has cost you not just the difference between purchase and sale.

In Planning for Financial Freedom back in June, I mentioned the concept of correct structuring. Structuring also applies to how you own your home. Should the family home be owned in an individuals name, held jointly or registered as tenants in common? The discussion about this question could be an article in itself! Suffice to say before your buy a family home, do seek some advice about how the ownership should be structured. It is as important as obtaining the correct finance package. It also has implications for estate planning. The old saying, “expect the best but plan for the worst” is an appropriate approach when it comes to financial arrangements.

Lastly, I should mention the old dreaded word, saving. A concept we all struggle with at times. In the case of home loans, the more you reduce your interest cost, the more you improve your financial position. Some of you will say that is obvious. However, it can be confusing when confronted with a decision about whether to reduce your home loan or invest in some other opportunity. We sometimes struggle to know which is best. I look at it this way. If you reduce your home loan by making additional payments you will receive a predictable return for your money of the before-tax cost of the interest, which when you do the maths could be as much as 14% depending upon interest rate and your marginal tax rate on income.

So when it comes to the family home make sure you get some good advice that relates to your own particular circumstances from someone that knows all of your arrangements and is appropriately qualified. It can save you more than you think.

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