The mechanics of fixed-interest losses

In a recent column you mentioned that someone who has all their money in fixed-interest risks losses if interest rates rise. I assume this means capital losses. Could you explain the mechanics of how that could happen?

When I used the term ''fixed interest'', I was not referring to interest-bearing bank accounts, I was talking about government and corporate bonds, where the interest rate is fixed. These perform well when interest rates are dropping, but if interest rates rise they can give the holder a capital loss because they become relatively less attractive to bonds that are being issued at higher rates. Also, rising interest rates usually mean inflation. One of the effects of inflation is that the maturity value of the bond is less in today's dollar terms.

I have an investment property and I'm considering demolishing the house, building a duplex and moving into one while renting the other. Would the duplex we live in be considered a principal place of residence and, if later sold, would attract no capital gains tax? Would we split the loan between the original cost of the property and the build costs to determine tax liability or deduction?

Julia Hartman of Ban Tacs recommends you split the loan. There will still be CGT applied for the period it was a rental, so it would be a pro-rata calculation with the first element of the cost base being the original cost of the property.

Noel Whittaker is the author of Making Money Made Simple and other books on personal finance. His advice is general in nature. Readers should seek their own professional advice. Email: noelwhit@gmail.com

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