Hi All,
Well, just finished reading the book and found it very good. The question I have is that there seems to be a distinct lack of reference to tax implications in the cash flow examples provided. Don’t misunderstand my intention, I think the whole concept of positve cash flow is great, but my understanding is that the income received from property is taxable and the interest payments are deductable. IF you are on the top marginal rate then this certainly has implications when your cash flow from a given property is on the skinny side.
I would love to hear other people thoughts on this. Does everyone take this into account or am I missing a crucial point here somewhere ??
Cheers
I take your point. But what I’m suggesting is that without considering the tax, what you may percieve as posite cash flow may actually not be when the tax is considered.??
The same way a place can be negatively geared.
What I am saying is that the tax on the income should be viewed as a cost if your intention is to be cash flow positive and was asking if most people consider that to be the case. Like I said, I’m happy to be educated but since this wasn’t mentioned in the book (from memory), maybe I am missing something.
OK, my last attempt to illustrate my point.
House Rented for $140 /week = 7280/yr
Mortgage = 125/week = 6500/yr
Interest component = 100/wk = 5200 / yr
Therefore positive cashflow = 780/yr (7280-6500)Considering tax ….
Tax liability = 48.5% x 7280 = $3530.8
Refund on interest component of mortgage =
$2522 (48.5% of $5200)
Therefore net tax liability of 1008.80 ($2522 – $3530.
Your prveviously $780 cash flow is now $228 in the red. ($1008 tax liability + 780 from rent after mortgage payments)Now granted the figures may not be totally accurate given current interest rates etc, but it illustrates the point I was trying to make…
That is, if you dont consider the tax in your equations, your positive cash flow may not be all it seems. This doesn’t seem to be mentioned in the book.Cheers and thanx for the feedback.
Considering the tax puts you
tax should be calculate base on income – deduction. In your calculation it should be base on your $780.
Kind regards
Jet Dollars
[Retire Young, Retire Rich] [strum]If you grab a free tax pack and the supplemental tax pack as well, available from newsagents and post offices, you should be able to follow exactly how tax is calculated on income.
A quite good book on explaining it all is “Rental Property and Taxation” by Tony Compton. I found myself a copy at http://www.businessmall.com.au From memory it was around $28 and I still refer back to it at times especially on how to claim depreciation.
If you want to get out of a hole, first stop digging.
If your rental return is $140 p/w and the weekly mortgage repayments are $125 then I would assume that the deal did not meet the 11 second rule. If the weekly return is 140 then the total purchase price should have been no more than 70k (if it is to comply with the 11 second rule) and weekly repayments of 125 seem a bit steep even if you borrowed the whole 70k. Although I guess it does depend on the particular loan.
It is my understanding that, according to the book, properties must (generally) fit the 11 second rule to be cash flow positive at the end of the financial year (as well as on a week to week basis).
Regards
SonjaLook into trusts.
Dom[biggrin]Just4fun, if you make a profit, then yes, you will be taxed. However, is that not the point? I’d rather pay tax, cos that means I am making money, rather than get a refund because I have been losing money.
Steve didn’t cover any depreciation benefits in the book either – he views that as a bonus, and not the reason for investing. I think it would be too hard to go into the taxation issues as the tax rates seem to be changing yearly, plus each individual’s circumstances are always different…
Cheers
MelJust4fun,
I agree that people are often not focussed on tax when discussing pozz gearing. So the elusive $8 a week or whatever people are looking for, actually becomes $4 a week net return after tax is taken into account. It’s take lots of cf+ houses to live off if you’re looking at $4 a week net return. OK, let’s make the return bigger… $60 a week return on your CF+ IP… so you end up getting $30 return if you’re in the highest tax bracket. Still, that’s $1500 a year. That’s about 30 CF+ places you’d need (from that scenario) to have a passive income to even get the average aussie wage of about 45k.
I think you’ve raised an important issue just4fun. Enjoy the Forum
kay henry
Hi Guys,
please be weary, the 11 second solution, is no longer applicable on most property purchases, just use it as a guide, but dont base your caculations on it.
Cheers,
sisThanks to all that have replied. Appreciate the positive feedback. Just shows that I have a lot of homework to do … but that has never scared me.
Thanks again.
HI all,
From my experience I have found the 11 second rule not making alot of sense, even though I find a property which appears to meet the criteria.
The Jaffa Pos. Calc. tells me a different story, and there is not enough money in most deals to make it worth while, considering risks involved etc.
Anyone out there experiencing same….[eh]
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