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Good versus bad debt

I heard someone talking about good debt and bad debt and I didn’t really understand what he was talking about but it had something to do with the tax system. Could you explain? 

Many money commentators or personal investment experts call personal debt bad debt and business debt good debt. This is where the tax system comes into this story. You see, personal debt is not tax deductible while business debt is. Therefore money gurus like Robert Kiyosaki say the rich are people who use the taxman to make them rich. He recommends you get rid of all personal debt and just carry ‘good’ tax deductible debt. I have met people who always rent places but buy properties, which they rent out. This reduces their tax bill and they get to hold assets that then grow in value. There’s one catch: if they sell these properties they would face a capital gains tax bill. To this these people say they don’t intend to sell their properties but simply keep them. As each property becomes more valuable, the new equity you have in the property can be used to buy another property with the help of a bank loan. Of course, you have to be able to service your loans but the taxman helps to reduce the impost. One point I would throw in is the debt you have over the home you live in is harder to service as it’s not tax deductible, but this property doesn’t attract a capital gains tax. I have seen some clever people get wealthy after buying run-down houses in good suburbs, doing them up, selling after a few years and then trading up. The lesson is that to get wealthy it’s really smart to learn all you can about the tax system — it should never determine what you invest in but it can make investment more affordable.

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Published on: Friday, November 27, 2009

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