I just don’t seem to be able to get my head around these two. +gearing, yes I make a little money each week over and above all costs.that is then income and I am taxed on it; but can have deductions. then I read that cash flow is better, and M. Lomas in How to create income..points out (pg26/27) that positive cash flow occurs where the loss is on paper, which can be turned to profit. figures here are income rent: 12,250 againsts expenses 17,133, then it goes on to show how tax can depreciate this ending up with cash in hand of $25.00 week. (far more detailed than this) Now, to me if the expenses are 5000, over his income on property, surely that owner must be putting in from his/her own pocket, much like negative gearing.?? I think maybe I am mathematically dyslexic! Can one of you brighter people help me out on this?
Trish again!Hey Trish ,
The key ingredient that Margaret Lomas relies on is a healthy deprediation schedule. She uses the tax return on the loss but also uses depreciatioon on the property, fittings, etc to push the tax return ito the positive instead of costing you money.
So the deal may cost you $5000 which is deductible but you also then apply the deductions from the depreciation and hey presto the tax dept give you $25 per year. While this is not neccessarily a bad thing you are still relying on the ATO to make it positive. MLomas calls this Positive cashflow as different from Positive geared where you do not need the ATO help to pay all the costs.
The other downside of depreciation is that you are effectively reducing the capital value of the house as ou depreciate it. So if you depreciate $5000 for building depreciation and you originally paid $200000 once the depreciation is applied the new value of the property for CGT purposes is $195000. Soif you sell the house three years later for $250000 then the CGT will be calculated on the spread of
$250K – $185K = $65K.This is the way I understand Depreciation to work and I am not an acct or any such thing so if I am wrong please you people who know please let me know if I am wrong .
Hope this helps.Enjoy
AD [:0)]“Carpe diem, quam minimum credula postero.”
Lat., “Seize the day, put no trust in tomorrow.”
-Horace, OdesHi Patricia,
I’m in the same boat….just can’t seem to figure out the difference. I’d like to ask a few questions that hopefully someone could explain…
+ve cashflow
* Does my cash flow have to be +ve before or after deductions for it to be classed as +ve?
* I think I read this comment on another post…”Negatively geared property with +ve cash flow”. By using allowable deductions to turn a negatively geared property into +ve cash flow. Is this a truely +ve cash flow IP?
Depreciation
I’ve read a few books and a number of articles on this site on depreciation. I thought I understood it but now …..I took the following quote from the article ‘Negative Gearing…Friend or Foe’
“Depreciation is an accounting term used to describe the wear and tear of an asset that occurs over time. In practical terms, depreciation on a property refers to the carpet wearing down, the walls becoming chipped or stained and the furniture dating”
Surely, wether or not I claim depreciation the property and fittings are going to wear. I realise that through this wear and tear the building will need maintenance and item need replacing. Why then not claim depreciation on the items and building? Or am I missing the point for/against depreciation?
AD made a point on this post about the building depreciation reducing the “value” of the property and so effectively increasing the net gain from a sale. I never knew this (actually I’m fairly new to property investing, so I don’t know a lot [
]) Is this the main drawback of building depreciation?Wow, I hope that all made sense! I’d appreciate it if anyone could help me sort it all out.
Cheers,
Confused
AD,
Link to the ATO web site with an example of how depreciation affects the cost base for CGT purposes.
http://www.ato.gov.au/content.asp?doc=/content/Individuals/22711.htm&page=6#P589_55017
Regards,
DS
Thanks Michael,
Your reply certainly cleared things up. If I have understood correctly, +ve cash flow is actual cash, +ve gearing is on paper after deductions.
My example…..
Rent: $155pw ($8060pa)
Loan : $536.86 pm ($6442.32pa)
Body Corp : $1354.80 pa
Management Fees : $950.40 paTherefore cash flow is negative with a $687.52 pa loss. ie: actual out of pocket expense.
Now, I am on the top tax bracket and pay approx $20000pa in tax. Allowing for on-paper deductions such as interest (approx $5000pa) and depreciation (approx $1500pa) provides a tax saving of approx $3000. Effectively the property is positively geared.
Do I have that right?
Thanks again.
Michael and Kaye you are fantastic and I agree with you.
Just imagine Margaret Lomas’ property was in a trust, which has no other income.
You could not use the depreciation and would be making a loss.
My properties are mostly neg geared at present, but I am out for cap gains in 6 to 12 months by subdividing the backyard.
Otherwise, I see absolutely no sense in Margaret Lomas’ approach.
Unfortunately the vast majority of properties in major cities are heavily reliant on depreciation/ neg. cash flow, and that’s what most of the so called property “investment”free seminars are flogging.
Cash flow positive property is flavour of the month and a new catch cry, so it’s now being flogged as cash flow +ve, if only due to the favourable depreciation schedule and heavy reliance on tax deductions.
Otherwise, a lot of so called fin advisors etc would be out of business, the whole invest. property scene has been buit up on this basis.
]) Is this the main drawback of building depreciation?
The topic ‘Positive cash flow? Positive gearing?’ is closed to new replies.
