Hi all,
I have a tax question. To set the scene lets say i own $3M of property and owe no money on it, i then draw 60% of this value as money to use for whatever, this money is tax free. The interest capitalises on the 60% loan and i refinance every 5 years according to increase in overal value. The properties are rented out and i pay the costs to maintain the properties such as water and rates etc etc.If i use my equity to live on, then the rent from the properties is the only taxable income i have and the interest (capitalising) and the ongoing costs such as water and rates are tax deductible AND infact MORe than the TOTAL income received. If however the overall amount is a negative taxable income (negatively geared) what happens from the ATO's end as technically i earned -ve dollars in the year, and thats quite a large amount of -ve taxable income. The difference here to a -vely geared property is that i dont have any "income" as such to offset the deductions against? It is my understanding that you would simply not pay tax, however how do you benefit from the huge amount of tax deductible expenses you have. In fact in the first year this could be as much as a $100000 loss. If this continues for 15years, what happens in terms of being able to claim all those wonderful tax deductions?
Can anyone help??
I prefeace this response by first saying that I am not an accountant and suggest you ask one.
However, my understanding is that if you withdraw equity from an investment and use it for other than investment purposes then the interest for this loan is NOT tax deductible.
With regards to the ongoing potential negative income (assuming it is still negative if interest is not claimable) my understanding is that the negative amounts compound year after year and are deducted against future income (ie sale of a property or other income).
Cheers
TammySnap!
Crazy Plan
If you want to live off equity why on earth would you start by borrowing 60% of the value of your assets. People who live off equity only take out what they need to live on plus any IP expenses that they have each year …. assuming their assets have appreciated sufficiently.
Cheers
Elka
when do you propose to pay the Capital gains tax,….. If you lend against the property and spend the money on lifestyle, this loan does not become tax detuctable,… what do you propose to do with the $1.8m you take out on the 60% lend,….
If I had 3mil worth of property with no debt I would suggest that you Just live of the weekly rental payment which a 5% rental yeild would be $120,000 pa,… I would then use the equity in those properties to buy more property and shares.
I seriuosly don't think the idea you are propsing would work.
It does work, thats exactly what the Investors Club do, live off the equity they gain each year, non-taxable income, thats what I'll be doing when I'm 30!
can you explain how the equity is non taxable,
Borrowed money is not income so therefore you wouldn't have to pay tax on money borrowed to live on – but you would have to pay interest.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I understand that borrowed money is not income, but eventually you will have to sell the property and repay the debt there by paying the capital gains tax, as well as the years of non deductable interest,
or am I missing somthing
Capital gains tax has nothing to do with debt. it will be the same no matter what debt is on the property, but you will have to repay the loan eventually.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Capital gains tax has nothing to do with debt. it will be the same no matter what debt is on the property, but you will have to repay the loan eventually.Yes I understand what capital gains tax is,
I am trying to understand the benefit of redrawing equity rather than selling,… some people have said the benefit is that you can get your equity without paying capital gains tax, But you are still going to have to sell eventually to pay off the loan and then you will have to pay capital gains tax from the sale of the property, plus you have to pay interest on any money that you redraw.
I am not knocking the idea I am just trying to find out the benefits,
I guess a lot of people don't realise they could end up in the negative in the end when GCT is taken into account. Many never intend to sell and just wsh to live it up till death.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:I guess a lot of people don't realise they could end up in the negative in the end when GCT is taken into account. Many never intend to sell and just wsh to live it up till death.Thereby ignoring the possibility that their kids will be left with a huge debt which they will have to pay out of their own pockets.
only good if you don't like your kids
Debt is not hereditary. They kids will be left with nothing, but maybe assets left in other trusts.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thank you, I didn't know that.
Still, they could be up for paying some of the CGT out of their own pockets couldn't they, assuming no other assets?Barney,
What an incredibly selfish Idea.
Having all that money and not willing to pay any tax what so ever..
I suggest that if you go down that path, the end of your life will be miserable.
Imagine being on your deathbed and looking back on all you contributed to society or others and seeing nothing but the burden left behind.
I am not a socialist, but a capitalist with a sense of social responsibility.
m.pulley wrote:Barney,What an incredibly selfish Idea.
Having all that money and not willing to pay any tax what so ever..
I suggest that if you go down that path, the end of your life will be miserable.
Imagine being on your deathbed and looking back on all you contributed to society or others and seeing nothing but the burden left behind.
I am not a socialist, but a capitalist with a sense of social responsibility.
How could you possibly judge a person so harshly on the grounds that you think they don't pay enough tax at a particular stage in their life?I look forward to the day that I can jump off the treadmill and LOE. This does not mean that I won't give anything back to the community (paying income tax is not the only way to do so).elkam wrote:Thank you, I didn't know that.
Still, they could be up for paying some of the CGT out of their own pockets couldn't they, assuming no other assets?Who, the kids? Why would they have to pay someone else's tax?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I must be misunderstanding the rules of paying CGT on an inherited property when you sell it.
If your share of an inheritance was a property that had been used as an IP don't you need to pay CGT when you sell it?
I thought that the capital gain was, simply put, the differance between what the person you inherited it from paid and what you sold it for. Is that not right?Cheers
Elka
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