Should I sell my property to wipe my debt, leaving me debt-free but with no investments?

Q.

I am a single mother and I work full time as an IT contractor. My gross income is $80,000 per annum. I generally claim up to $15,000 in expenses in my tax return. I have two mortgages, both interest only, on my home. One is the original mortgage of $320,000 which I took out eight years ago. It is currently fixed for the next three years at 7.35%. The second mortgage is for $46,000 which I took out last year. This mortgage was used for major repairs to my property. It is currently a variable interest rate of 5.04%. I also have a $20,000 credit card debt which I am trying to pay off slowly. It is a low rate credit card and the minimum payment per month is around $300. My apartment is currently valued at $410,000. The apartment next door sold for this price last month. A friend suggested that I rent out my home for a couple of years - negative gear it. He said that I would be able to get a larger tax return which would help reduce my current debt. My other option is to sell, pay out my debts, and walk out with nothing and start again. What should I do?

What you propose may be a reasonable strategy provided you can find a cheap place to rent. Let's assume your total interest bill would be $26,500 per year and the returns from the property would be $15,000 after paying rates, insurance etc. This would leave you with a cash shortfall of $11,500 per year. You would probably be eligible for at least $2,500 per year in depreciation, so your loss for tax purposes would be $14,000 per year. Consequently your tax refund would be $4,400 per year and you would be out of pocket $7,100 when this was deducted from your cash shortfall. Armed with these numbers you would need to do your own calculations as to the feasibility of the plan after you factor in the cost of renting.