Thinking through the idea of how to make housing more affordable to home owners (not investors), I came up with this – now don't get me wrong, I'm not going to campaign to the govt about this, but I wonder if this has ever been considered by the govt?
It's simply to make the interest you pay on your PPOR tax deductible, the catch being that any capital gain that was made from the PPOR was taxable, in the same way as it it for an investment property. This means that rather than throwing thousands of dollars at people (eg the FHOG) to try and make housing more affordable, the govt can make home owner's repayments more affodable by allowing the interest to be tax deducted – then if profit is made on the property at sale, they pay the normal rate of CGT (ie, with the 50% tax break after owning for 12 months). That way, if you never sell, you don't pay the tax!
What does everyone think of this? I don't profess that this is the answer, but does it sound like a good or bad idea?
Sounds to me like your idea will give the rich a much better deal, and those on low incomes a much worst deal than they already have.
I'll think I'll get rich, buy the most expensive house I can with the biggest mortgage I can and claim the deduction (at the highest tax bracket of course). And instead of moving I'll just borrow more to extend and renovate every few years. All the while earning 8% on the cash I have in the bank. Bring it on (In about 5 years when I can take advantage of your proposal).
Having said that, keep posting your ideas.
JLHmmm….that's a good point in regards to the rich taking advantage of this, but I don't see how it's a worse deal than present for those on low incomes? Please elaborate….
Say you live in country australia and your first home will cost you $80k. Your income may only be 30k. You only pay $2400 tax anyway, and with some normal work deductions this means that you may only get back $2k per year of the interest you pay. It may take you 5 years to gain the same benefit as it does with the current system, all the while having a larger loan, because you had $7k less of a deposit. And even worst, without that $7k a home may not be possible because you cannot save enough on the low income to have a deposit, particularly while paying rent.
It's a good idea, it just won't work.
JLjudging an idea by considering two extremes ("rich' people and then an entry level person) isnt really logical, as the bulk of people are in the middle.
mpertile, your idea is quite valid and is in fact how things work in many parts of the world. It is often balanced with other taxation measures to stop the very wealthy benefiting excessively. Oz is one of the few places that encourages investors and not owners with tax deductions. I lived in Europe until recently and where I was rents where 2-3 times the levels here, salaries about double and interest rates less than half . Investors got no breaks and mortgages where tax deductible. Many people still chose to rent for life.
JL – I see your point, let's say we added to this example a method of having the the $7k FHOG means tested, so that in an example like yours the initial assistance is there in extreme cases, but as yarpos said, the bulk of people are in the middle, and allowing them to tax deduct their interest would be much more financially beneficial than $7k upfront. For example, where I live on the gold coast, the average house would be about $400k – $450k. The annual interest on a $320k loan (80% of $400k) is about $28k per annum. Getting 30% (obviously depending on the tax bracket) of that back per year (about $8.5k) is much more attractive to me than a measley $7k upfront, which doesn't really make any dint at all in the $80k deposit!
If I use my own personal circumstances as an example, I currently pay $375 per week in rent at my PPOR (I have investment properties, but I rent where I live at the moment). Using the figures above, I could then buy a $400k home, and if I were able to tax deduct the interest, ($28k-$8.5k = $19.5k/52 weeks = $375 per week!) I would then be paying as much in interest as I am currently paying in rent. This would make it more affordable for me to buy my own place, and as a trade off I have no issue in paying capital gains tax to do so.
I just don't see how this won't work!
I was thinking of a similar thought recently to redress the balance, but instead of a home owner CGT I was thinking they should remove the negative gearing benefits of investment properties.
I can see a big issue with CGT on your own home. Imagine if you buy a house for 300k, 20 years later it is worth 1 million. You want to shift to another suburb in the same city to move into another house also worth 1 million and get charged 40% of 350k = 140k CGT PLUS have to pay maybe another 50k in stamp duty on top of your real estate agents fees, maybe another 30k.
In total to switch houses of exactly the same value you lose 220k = 22% of the value!!
In the USA they have this interest deduction from your tax bill and i see it as a key contributor to the mortgage crisis. Everyone borrowed to the hilt against the value of their house to take advantage of these benefits. Would anyone ever even try to pay off their house and therefore lose their tax benefits? Of course not.
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