What is ‘Good debt’? Deductible vs Non deductible debt
At RP Wealth Management, we always review our client’s debt and educate them on the difference between the net cost of deductible debt versus non- deductible debt.
Common examples of ‘non-deductible debt’ include taking out a home loan to purchase a property you intend to live in or paying personal expenses with your credit card.
Deductible debt includes interest on borrowings which can be offset against your taxable income which as a result reduces your overall taxable income eg. An investment property with a loan attached that is rented out.
The worst would be non-deductible debt and is debt that you pay down and receive nothing back in terms of tax deductions.
Of course you must be paying tax to incur any of these deductions as deductions can only be offset against income. Whilst this may seem obvious there are couples with deductible debt who hold investments in the non-working partners name which results in No tax being paid so No deductions being received.
So whilst there are many advantages of ‘good debt’ you should first factor in the costs, expected capital growth and worst case scenarios as the debt only works at tax time, however if you have an investment not performing the way you expected then the deductions don’t mean much if the investment isn’t growing.
Let’s not get confused though – debt is still debt and you are usually going to be better off without it, but some debt (like deductible debt) may in fact be ‘good debt’.
When deciding which one to pay off you can go back to the factors of which one provides you with benefits and which one will only incur interest.
If you would like to see how this relates to your investments, please contact me on 0434502079 to discuss further.
Ronald Pratap RP Wealth Management
Invest l Protect l Enjoy
This information is of a general nature and has been prepared without taking account your objectives, financial situation or needs. You should consider the appropriateness of the information, having regard to your objectives, financial situation and needs.
This information is current but may be subject to change.
Taxation law is complex and this information provided is general in nature only and does not constitute tax advice. We recommend that you seek independent advice from a tax adviser or registered tax agent specific to your individual circumstances.