Forum Replies Created
Mike,
Remember that you are also better of defering incurring of investment expenses, like getting a depreciation report, or fixing things on a property until it is a rental. That way the expenses are deductable in the year incurred.
Corey,
3 things stand out on your hypothetical as limitations or barriers to your goal – “building a bank to purchase a home”
1) 10-12 hours of work a day
2) 50+% of your disposable income on rent.
3) short term investing in property.The work hours will restrict you ability to add real value through renovation if you plan to do it yourself. You would basically be a weekend warrior, and weekends fly by very quickly. A lick of paint doesn’t add enough value, converting a 2 bedroom into 3 reno can, but it takes time, and expenses still keep coming while you are not getting rent doing a reno. And all of your savings will be used buying pretty much anything in Perth after costs are taken into account, which means you need to rely on your disposable income.
Most people who make money through reno’s generally still make most of the gain through the rising of the market in general. This isn’t really the case in Perth at the moment “short term”. Those that are able to make a success of it, have usually done it more that once, and are now working on properties that are will out of your hypothetical price range.
The costs to short term property investing are quite high if you plan to sell to get the money to uses for your own home, stamp duty, selling costs, tax etc all need to be taken into consideration. What is short term ? < 3 months, 12 months, 3-5 years.
Subdivision still takes a while, but the Joondalup area has a plan to rezone many areas to higher density, allowing for many properties to be subdivided, maybe it’s worth looking at potential sub-dividable blocks within the proposed areas. There are areas of Heathridge, which are close to schools, parks and shops that fall into the proposed rezone areas.
Alternatively, why wait to build a bank to buy your own property ? Why not buy something to move into yourself, putting your rent into your own property. Buy a unit that you can reno in your own time. This would leave you with more money as you could save on stamp duty through FHOG. Add value at your own pace to suit your work hours. When you’ve built up some equity, rather that sell, access the equity to buy another property, either investment or new home. Or if you sell, you don’t have to worry about CGT.
As Terry said, if you don’t know how to use excel, learn. Do the numbers to see if any scenario is worth it.
The stock market may be a better short term solution, costs are much less, it’s more liquid, and you have almost the same chance of stuffing up as short term investing in property if you have never done it before and don’t do your homework.
Also for short term, spend a few buck trying to pick the first 4 in race 7 at Flemington on Tuesday, I can almost guarantee that if you get that right, it will reap more that your first foray into short term property investing.
By the way, I’ve been doing a reno as a weekend warrior, but paying the pro’s for things I can’t do myself or don’t have time to do. I could walk you through Bunnings blindfolded to get anything you want, or tell you what to buy elsewhere. The time has blown out by about double, and I’ve done more that I intended to from the start. It was never intended to be a short term investment though, had it been I would be out of pocket. And I thought I had the money and equity to back myself, that was until I lost my job a couple of weeks ago. No income from a Job and no rent, is a bit of a wakeup call, you can’t put all your money on the table, you have to leave some in reserve ( a few month worth). Now I’m a weekday warrior also, to get it done, better go I have to finish the skirting so the carpet can go in.
Cheers
For your PPOR to be possibly exempt from CGT you must also have moved into it as soon as practical. Eg. You can’t have left a tenant in there until the lease expired, and you can’t just let it sit there until you decide to move in (unless say you are renovating it to move into).
With regards to the question about the 6 year rule for exempting you PPOR from CGT, you can move into another one of your rental properties, you just don’t say that it is your PPOR. Either way you never have to declare which one is your PPOR until you sell one of them. The rental property that you moved into may grow significantly in capital compared to your original PPOR. In which case it may be worth you while declaring the rental as you PPOR from when you moved into it, to reduce the CGT when you sell.
Just remember to keep all records for expenses on both properties, just in case you later change the status of which one is your PPOR, because the unclaimed expenses can be used to adjust the cost base for CGT purposes.
As for the FHOG, if you say buy a property and move into it after 6 months to satisfy the rules of the FHOG, you will be entitled to the FHOG. However, because you didn’t move into it straight away, it will never be totally exempt from CGT (unless you die while living there).
No worries Jamie,
The reply just made it sound like a person would miss out on that deduction if they didn’t pay to have the report done.
I was just trying to make it clear that there is is an alternate to QS doing it for you, $200 is good, however some QS’s will charge $500 for the same service.
Cheers
Jamie,
You obviously did not read the entire post or understand the post. I was not saying do not claim depreciation, I’m saying that there may be circumstances where there may be no need to commission a QS to do it for you.I still claim depreciation on pre 85 properties. I have a pre 85 IP that I settled 2 weeks before the end of a financial year. I claimed approx $2500 in depreciation and low value pool deductions that I calculated myself.
There are 2 part to a depreciation schedule
1) the building, claimed as Capital Works Deduction. You cannot work this out yourself, a QS must do it.
2) the depreciable assets, claimed as Decline in Value Deductions. You can work this out yourself and do not require a QS.If the building is old and not really been renovated then there is nothing really for the QS to do, and a good QS will tell you it’s not worth doing.
What a QS will do is value the depreciable assets, carpet, blinds, air con, white goods, exhaust fans, floating floors etc (which I’m saying you can do yourself).
A QS can pretty much guarantee that there will be enough deductions in the first year to cover the fee, as anything less that $300 can be written off 100%. And the use of Diminishing value method over Prime Cost method of depreciation usually makes a big difference in the 1st year.When you buy a new asset for your 1950’s property, do you go back to the QS to add it you your schedule and write off the old asset.
No (well I hope not), you just add it yourself or get your accountant to do it. Why?, because you can. Cost $0A good exercise is to try and do a valuation and estimated remaining life yourself (use the list of assets in the tax guide as basis), when your QS does it , see how close you were. Most people would not be out by too much.
Ricky,
If the property is pre 1985 and not really had any work done to it, then it’s not worth getting a depreciation schedule done for the building.
You can’t work out the costs of a building costs for capital allowance.
However, you are allowed to come up with your own value for depreciable assets.
I have a couple of pre 85 investment properties where I’ve worked out my own value and remaining life of the assets. After doing this just ask the accountant if the values appear reasonable. Just use the Rental Property guide on the ATO website as a guide for what you can claim and expected life of assets. http://www.ato.gov.au/content/downloads/IND00237831N17290610.pdfHaving said that I do use a QS for other properties, built in 1990’s or older properties where there has been renovations done
If you rent out the townhouse it will only become liable to CGT once it becomes an Investment property when you buy a new home and make the new home your PPOR.
The tax is then based on the period when the townhouse became an investment property (when you bought the new home), until the date you sell the townhouse, divided by the total time of ownership x Capital GainSee this link for a simple explanation http://www.ato.gov.au/individuals/content.asp?doc=/content/00237979.htm&page=81&H81
The maximum loan attributable to the townhouse as an investment is 275K. But it could be even less if you have been using the existing loan with a redraw facility that you have been drawing on.
I don’t know about getting the stamp duty back, you can only reduce you stamp duty under existing schemes. The stamp duty paid on the townhouse will form part of the cost base for calculating CGT if you decided to go down that path of it becoming an investment property.
You can borrow against the townhouse, but the use of the money still determines if the money is tax deductible. Meaning you can’t borrow the deposit for your new home and have that amount as a tax deduction.
If the townhouse is going to become an investment property, 1) pay interest only on the loan, 2) don’t spend any money on it where possible until it becomes and rental, so that the expenses are deductible.
Good luck
Thanks for the well researched response Mr501.
I did much reading of the ATO site and relevant tax ruling.
I just wish I’d read your response prior to contacting the ATO to use in my argument.
TR 2004/4 covers the interest side of things ok. http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20044/NAT/ATO/00001After speaking with someone at the ATO, I was advised,
1) declare the amount I received as a reimbursement for damages as “Rent Related Income”
2) Claim as a deduction – Interest on the loan only.3) No other deduction for Insurance etc could be claimed. ( I found this very odd)
The rest of the expenses was 100’s not 1000’s of $ like the interest, so I’m not going to complain.
I found 1) above to be odd also as generally you can offset the income received as reimbursement for damages, insurance claims etc, with the directly related expense even if the expense is incurred in the following year.I found the case very relevant as part of the reason for my delay in getting the work complete, as I’m doing most of it myself, is because of my inexperience in identifying all the problems, I’m obviously a crappy planner (my wifes words), and my personal circumstances ( still recovering from a broken leg and surgery due to a skiing accident).
Note to self: don’t by any new properties just before the end of the financial year if it’s not going to be rented.
Thanks again, for all responses and opinions.
Thank you Glenn Stevens.
After being made redundant late last week, I though for sure I was going to get a kick while down.
Lashed out and spoilt myself, upgrading from nothing for the past 8 years to a 93 Toyota Hilux Duel Cab Ute.
It's great to be able to use my trailer without having to borrow a car.Sheree
I don't think that the above responses answered what you were actually asked.
You don't want to backdate depreciation , so much as transfer losses to future years.I'm pretty sure that you can carry forward income losses to future years, until the loss is exhausted, similar to that of a Capital Loss.
If you had income that was taxed (PAYG) say $1000 during the year. But your investments after expenses caused you to have a loss of $5000.
You would receive the tax refund for the $1000 and carry forward to the next year a $5000 income loss. There are some deductions that cannot be carried forward as a tax loss (such as personal super contributions and some donations). But I think that all expenses from investment can be, including depreciation.Not everything that seems to good to be true, actually is. Check with you accountant.
I think in this market buying a property that needs major renovation as opposed to a property that any hack can touch up, is a better idea.
The property needs to be significantly lower in value to it's surrounding neighbours, where it will be virtually impossible to over capitalise.
My wife is currently renovating a 3br house purchased for $210K , houses either side of it are valued upwards of $450K.
The house was not livable, but structurally sound. Needs new bathroom, kitchen + appliances, carpet, paint, windows.
Reno Cost +50k. Almost complete, 3 month project, recent rent appraisal $420 p.w.
There is still an un-renovated Granny flat out the back to be done as well. Spend 20-25K on it and it will attract a rent of $140 pw.
There will be no need to sell an investment like this as it will cover it's own costs until the market does eventually turn.I've always used Washington Brown and have been happy with the reports
www.washingtonbrown.com.au/Reeco,
Start by going out there and finding a lender who will lend you money, and get pre-approval.
This will allow you to eliminate what you cannot afford. When you have worked out what you can afford remember to leave some money in the kitty to do the required sprucing up of the place.If you have capital losses carried forward from previous years then the Capital Gains are offset against the losses prior to the 50% discount.
Carried forward loss – $10000
Gapital Gain – $42000
Net Gain – $32000
Capital Gain after 50% Discount – $16000I would definitly go with the building report.
I've had building reports done on a unit within a block of units where I already own a unit.
The report showed up damage to the bathroom that had been fixed, but was still an issue.
I negotiated a reduction in price of $2500.You won't be exempt from having a capital gain , buy yes it would likely be beneficial to sell in the next financial year. Your capital gain net of any capital losses (less 50% if owned for more than 12 months) is simply added to your income and paid at your marginal rate. So if you have next to no income in a particular year you will be much better off selling in that year as you will have a lower marginal tax rate.
I'd look for something that I could fail at. A challenge is good for you so is failing, as long as you learn from it.
Higher risk, better reward.I wouldn't consider requiring LMI as having oodles of equity.
If you can, upstamp your existing loans to 80% so that no LMI is required.
Use that as your your deposit and only purchase something that will only require a small amount or no LMI.If servicibilty really is an issue for you and not just an on paper issue for the purpose of getting a standard loan, then maybe you should put off the next purchase for a while, no point stressing yourself out about it, you have to cover those unexpected expenses, or temporary lack of a tenant periods also.
I don't have a problem with borrowing beyond 80% and incurring LMI, but I only ever use it when I know the market is going up in the short term.
I'm in Sydney and all of my investment properties are interstate.
It's not a barrier, infact I think that you tend to put a lot more effort into researching an area and doing the numbers, making sure you have finance etc, before you jump on a plane and start to look at physical properties.I must admit though that a friend was looking at properties in Cairns and saw one that he thought we might be interested in, we agreed he put a holding deposit on for us and before we knew it we had purchased our 1st property 2000 km away and we hadn't even seen it.
The trick is do you research, do the numbers, while working out your finances. If you can't afford to do what you want at the moment, the worst that will happen is that you will have learnt about the regions you have been researching, and will be better prepared to spot a real bargain. Hey, tell a mate about it, and maybe they will return the favour one day.
