Ask Paul: Should I sell investment unit to pay $100k personal debt?


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Q. I used to watch the Money TV show some years ago and I am now 33.

I purchased a live-in apartment in Wollongong seven years ago and turned it into a rental property six years ago. I paid no stamp duty at the time.

The purchase price was $229,000. I now have received an offer of $399,000. I am aware of the six-year rule and any capital gains up to this month attract zero tax.

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I earn $80,000-$100,000 a year as a casual skilled labourer working around Australian ports. My partner is currently looking for work. We have no dependants.

At current interest rates the property itself has solid deductions from the common fittings and fixtures, etc, and pays for itself with some rollover deduction to my employment income ($2000 income reduction).

However, we have spent much time overseas both wastefully and meaningfully on tertiary student exchange and travel.

And so we have amassed a total of $100,000 of personal debt, including the cost of our recent wedding. This is now attached to the property asset. We rent a different property, as it suits us better.

Should I sell the investment property to release the equity and remove the personal debt, starting anew with a $100,000 cash asset for a share investment or a home in some years? Or should I hold the property, and the debt, indefinitely? - Roman

A. An interesting question, Roman. It sounds as if you have had a really stimulating time travelling and studying.

Over the decades I've also spent a fair bit of money doing that but I don't see it as a waste.

Wollongong, as you know, has excellent growth potential. Given that your apartment has increased in value, it is a sign that it is in a good location. Presumably the rent has increased as well.

I do realise you would start to pay capital gains on future growth but this is only when you sell and it would be at a discounted rate of tax.

As you are earning a good income, my inclination would be to keep the apartment. Selling costs are high on property and then it will cost to re-invest.

I think this is a personal choice. I agree it would be great to be debt free, then rebuild from there.

If you do sell, providing you invest the proceeds after clearing your debt, I am not against that.

Personally, I'd only sell when I was ready to buy a home to live in and use my income to reduce debt.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
July 5, 2018 2.42pm

If Roman move back to this apartment and live there for another 6 months, does second "six years rule" will apply?

July 5, 2018 5.26pm

The language here is interesting. He's saying "we" when it comes to the debt then asking "should I sell the investment property?". Surely it's a joint decision now, even if you bought it before the relationship started.