Efficient debt structure

Our Experts Answer:

You want to use your cash to provide the greatest possible return. Thus, unless you have a use for it that will give you an after-tax return better than the interest you save paying off your owner-occupied mortgage, you should use the money to reduce that mortgage.

You have correctly identified that you will end up with an inefficient debt structure from a tax perspective if you buy a new home and retain the current home as a rental having repaid the mortgage. You say you are reluctant to move the existing home into a trust or company.

Unfortunately, the only way you will be able to get a tax effective outcome is to do so. Invariably you are much better off transferring a home that is about to become a rental into a company. This allows you to maximise the amount of deductible interest.

Note there are tax consequences that need to be checked before you proceed, particularly pertaining to the bright-line rule. In summary, the only way to get the optimal tax structure when you convert your home to rental use is to transfer it into a new entity, likely a company.

When the time comes, you should seek advice to ensure that no adverse tax consequences arise due to any specifics that I am unaware of and because we are talking about a future event which may occur when the law is different.