Paul’s verdict:

Buy the home you would like to live in and rent it out

With your own subsidised rent, you will build wealth more quickly

Your question very much reflects the world we live in, Nathan. Your situation is typical of the work environment that has developed over the past couple of decades. The good news, though, is that this presents some powerful wealth-creation opportunities and I believe you are in a sweet spot for this.

I am not a fan of our overly complex tax system. One of my least favourite rules relates to negative gearing of residential property. Sure, I’ve used it as part of my own wealth-creation plans and I encourage others to do the same. However, I still don’t like it.

I suspect that Money magazine readers are all over the rules around negative gearing, but let’s recap. The interest on money borrowed to buy an investment can be offset against the income produced by the investment in excess of expenses. So if interest is in excess of income, it becomes a tax deduction. That all seems reasonable, so why don’t I like its application to residential property?

Every other first-world country does this differently. They want as many people as possible to own their home. So they make the interest on a home mortgage deductible, not the interest on investment properties. In some moment of madness a long time ago, our forebears decided to make your home mortgage interest non-deductible, but the interest on an investment property in excess of after-expenses income tax deductible.

Pretty obviously, this makes it harder to own a home but easier to own an investment property – or, in fact, a truck-load of investment properties. I used to be pretty agitated about this, but the climate has changed dramatically around interest rates. Back in the early 1990s, interest rates on a mortgage were running at above 18% and rates above 10% persisted for more than a decade. This was murderous for homeowners, but as it was deductible on an investment property, the pain was much less for investors.

Today low rates of interest have greatly diminished the value of negative gearing. Personally, I think this makes it a great time to do away with the rule, but no government will do it as it is simply too popular.

So what does this mean for you? You ask, “Do we buy an investment property this year or wait to purchase our primary residence first?” My answer is you do both.

In your shoes I would be preparing my budget, looking at surplus income, considering things like job security and family plans and heading off to some lenders to check out my borrowing capacity. My view is that you should buy the future home you would like to live in, but rent it while you live in your partner’s work-subsidised home.

Our tax system also has a “sixyear rule” where you can buy a principle residence and, providing you live in it for a period of time, have your personal belongings in it, have your mail delivered there, it is your electoral address and you have things such as power and gas connected and have no other principal residence, it is deemed to be your “main residence”. If you then moved out for work or other such reasons, the property would be CGT exempt if you sold it for up to six years.

I wanted you to know about this, but I think it is a bit of a distraction. The primary point here is that while you have subsidised rent and you are happy to live there, it gives you a wonderful opportunity to buy a home where you would like to live in the future, but gain the benefit of renting it and offsetting all running and maintenance costs, plus interest on your loan, against the rent. I reckon this is a cracking strategy. You can use your current subsidised rent and rent from the property you buy to make the purchase that much easier to manage and allow you to keep building your wealth more quickly.