All Topics / The Treasure Chest / Estimate profit from selling IP

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  • Profile photo of HueyHuey
    Participant
    @huey
    Join Date: 2003
    Post Count: 213

    Estimate profit from selling IP

    BUY

    – Purchase Price $450,000
    – Carpet, blinds 7,000
    – Stamp duties, bank, solicitor fees $20,000

    Total : 450,000 + 7,000 + 20,000 = $477,000 (B)

    Keep for 2 years, tax claims druring this time:

    – 2.5 % depreciation of building cost 180000 * 2.5% * 2 = $9,000 (a)
    – Other depreciations : 4,700 + 4,000 = $8,700 (b)

    – 20% on Bank fees : 200 * 2 = $400 (c)

    SELL

    – Sell price $520,000
    – Agent fees : $10,000
    – Bank, solicitor fees : $1,500

    520,000 – (10,000 + 1,500) = $508,500 (S)

    Calculate NET PROFIT:

    = S – B – a – c

    508,500 – 477,000 – 9,000 – 400 = $22,100

    Taxable gains : 22,100 * 50% = $11,050 … gain

    NET PROFIT : 11,050 + 5,690 = $16,740

    +++++

    I was told that depreciations claimed on building costs (a) will be deducted from the purchase price when selling but not other depreciations (b) . It doesn’t make sense to me!

    Is there anything else that I have missed out?

    Your inputs are most appreciated.

    Huey

    Profile photo of HueyHuey
    Participant
    @huey
    Join Date: 2003
    Post Count: 213

    Oops! I should minus (not add) $9000 depreciation of building from the cost base. Thanks Michael,

    Other depreciations = fittings like Carpet, kitchen appliances, security system ….

    We spent $7000 for carpet, blinds and have claimed depreciations for them every year. Can we still add the $7000 to the cost base?

    We claim bank fees (= $1000, from $20,000) over 5 years. (1000/5 = $200/year or $400/2 years). Should $400 be deducted from the cost base since I’ve already added $20,000 to the cost base?

    Because we only get $400/wk rent, after paying for agent fee, rates … it’s not much left! We are in red even after claiming depreciations for building & fittings. From the below calculations, after 2 good years in property market if we sell the property we will get $21,664 from $70,000 increase in value.

    I keep thinking is it worth all the worries? Should I sell it & do something different? We have to prepare for bad times as well.

    Cheers

    Huey

    +++

    BUY

    – Purchase Price $450,000
    – Carpet, blinds 7,000
    – Stamp duties, bank, solicitor fees $20,000

    Total : 450,000 + 7,000 + 20,000 = $477,000 (B)

    Keep for 2 years, tax claimed during this time:

    – 2.5 % depreciation of building cost 180000 * 2.5% * 2 = $9,000 (a)
    – Other depreciations : 4,700 + 4,000 = $8,700 (b)

    – 20% on Bank fees/yr : 1000/5 * 2 = $400 (c)

    SELL

    – Sell price $520,000
    – Agent fees : $10,000
    – Bank, solicitor fees : $1,500

    520,000 – (10,000 + 1,500) = $508,500 (S)

    PROFITS:

    = S – B + a + c

    508,500 – 477,000 + 9,000 + 400 = $40,900

    Taxable gains : 40,900 * 50% = $20,450 … tax at 48.5% = $9,918 (my hubby has 99% ownership, he is in high tax scale)

    NET PROFIT : 508,500 – 477,000 – 9, 918 = $21,664

    ++++

    Profile photo of hilaryhilary
    Member
    @hilary
    Join Date: 2002
    Post Count: 146

    Have u checked on those selling fees? I don’t know of any agent that will sell a property for $500k and only charge $10k commission – or did I misunderstand. I know of someone who recently listed a property for $239k and will pay about $8k comm.

    Profile photo of ldp43.ldp43.
    Member
    @ldp43.
    Join Date: 2003
    Post Count: 10

    Carpet & Blinds, only $7000 less amount claimed as depreciation goes into cost base.

    Also $1000 Bank Fees, $200*2 already claimed, balance of $600 into cost base.

    Other depreciations $8700 ?

    Say purchase price $450,000 and deprec items = $20000 (stove, HWS etc) then cost base = $430000.
    On sale add $20000 less deprec claimed.

    Laurie

    Profile photo of AdministratorAdministrator
    Keymaster
    @piadmin
    Join Date: 2013
    Post Count: 3,225

    Don’t sell it – use the equity to help buy you another property.

    This type of property investing is not meant to be short term. If you sell in two years then you will be luck to muck anything usually.

    If this property keeps growing at the rate you mentioned (about7.5%) then it will be worth about $900,000 in ten years.

    Profit then will a bit [:D] higher.

    Investing for capital gain not weekly income must be treated as a long term investment.

    My thoughts

    Petters

    Profile photo of Pete_6Pete_6
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    @pete_6
    Join Date: 2002
    Post Count: 1

    vh2000

    I may be mistaken, perhaps someone could correct me, however, are your final calcs correct re. Net Profit (gain)?

    ie. 508,500 – 477,000 + 9,000 + 400 = $40,900

    Taxable gains : 40,900 * 50% = $20,450 … tax at 48.5% = $9,918 (my hubby has 99% ownership, he is in high tax scale)

    NET PROFIT : 508,500 – 477,000 – 9, 918 = $21,664

    I thought they went along the lines of:

    Taxable gains : 40,900 * 50%= $20,450 (so only this amount is taxed at your husbands tax rate of 48.5%)

    Thus $20,450 (Half of the total gain)
    + $10,532 (Net after 20,450 – 9918 tax)

    Net Profit = $30,982

    Petelonta

    Profile photo of HueyHuey
    Participant
    @huey
    Join Date: 2003
    Post Count: 213

    Thanks all for your inputs.

    We haven’t decided to sell our IP yet. When we bought it the agent gave us higher estimates for rental & depreciation claims. He did not even include deductions of building depreciation from the cost base after keeping the IP for 10 years. The IP has been negative geared. We rely on claiming tax on depreciations to make up a part of its loan payment. In the peak market our IP value has increased by 7.5%/yr. We won’t expect the market to perform the same in the next few years! Our IP requires some increase in value to break even. When we bought it we planned to keep it for a long time but with its low rental returns and a little bit better understanding about CGT I think I should reconsider options.

    $10,000 for commision was only my rough estimate. I forgot to ask the Agent about his selling fee when I talked to him last time.

    I’m still not clear about effects of Fixtures & Fittings costs at selling time (or although Michael expained it clearly but I still hope it should NOT be like that). Our IP was new when we bought it. We claimed depreciation for carpet & blinds together with other F&F in the last 2 years. We paid $7000 for carpet & binds before renting it out. If we can’t claim back $7000 or the remain of that amount (minus $ claimed for depreciation) when we sell the IP it’s not FAIR at all. I’m confused because if the builder put in the carpet/blinds & sold the property to us for $7000 more at that time this amount is already included in the cost base.

    It makes me wonder what could happen to house renovations! If we put in $50,000 to renovate an old house (build a new kitchen, with new appliances, new barhroom, new carpet, new paint) I know we can claim depreciation but if we sell the house soon after renovating can we claim anything back at selling time? What if after paying $5000 for new carpet & claiming its depreciation for 3 years and the tenant badly damages it which needs to be replaced, what can we claim?

    Cheers

    Huey

    Profile photo of dr housedr house
    Participant
    @dr-house
    Join Date: 2001
    Post Count: 281

    We had a similar situation buying a beautiful apartment on the gold coast, with the original intention of living there.
    It was very much negatively geared and what makes these places even more expensive is body corp fees (almost 7000 p.a. in our case). We sold at break even point, when we decided to stay in Melbourne.
    i think to hold this sort of property with the continuing expectation of similar capital gains that have been is a risk. this is not a given!
    If prices start to level out or even drop, its these sorts of properties that get affected first.
    Stay with in average or low averrage price range, growth area, cash flow neutral-positive if you can.The sort of thing 80% of the population can afford!
    i now tend to avoid anything that looks like body corp, it significantly adds to overheads and is not in keeping with my invest. strategy.
    R/E agents charge 2.5 to 3% commission, don’t forget hefty advertising fees.
    I think if something has been depreciated, it cannot be included in your cost base at sale, that would be double dipping.

    Profile photo of Andrew6Andrew6
    Participant
    @andrew6
    Join Date: 2003
    Post Count: 7

    I have been following this thread with great interest as I learn more about the “art” of investing in real estate. I think I have followed this through successfully but if you could make a new thread and walk through the example again with the original numbers and final correct calculation formula I would greatly appreciate it.

    Thanks in advance,
    Andrew

    Profile photo of HueyHuey
    Participant
    @huey
    Join Date: 2003
    Post Count: 213

    Hi Michael,

    I hope to see your new topic soon. I’ve been reading from different sources to have a better understanding about tax claims on depreciation & their effects on the cost base at selling time but so far so … clear as mud! It’s not unusual that each taxman can give us a different answer.

    Cheers

    Huey

    Thanks

    Profile photo of ldp43.ldp43.
    Member
    @ldp43.
    Join Date: 2003
    Post Count: 10
    Quote:
    Laurie, I agree with you on the $600 fee issue, but disagree with all your depreciation calculations.

    Michael (Michael & Kaye)

    What you have since come to realise is what I was trying to demonstrate.

    When you purchase an IP, the depreciable items are effectively removed from the purchase price to establish a cost base, and the written down value of those depreciable assets on sale is added back to the cost base.

    eg House & land $200K Including F&F of $20K

    Cost Base = $180K + Purchase costs not expensed.

    Held for 3yrs and depreciation of $9K claimed in those 3 years.(leaves a WDV of $11K)

    Sold for $260K

    Excluding Purchase costs not expensed, Sale costs not expensed and Div 43 Capital Works prev claimed (if applicable), Cost Base is therefore $191K.

    Capital Gain is $69K (adjusted by those other items).

    If you look at it, $260K – $200K = $60K

    Capital Gain $69K – Deprec prev 3 Yrs $9K = $60K

    The benefit is the discount on the Capital Gain.

    Regards…

    Laurie

    Profile photo of HueyHuey
    Participant
    @huey
    Join Date: 2003
    Post Count: 213

    Can someone please confirm info from Laurie? ATO & M Lomas’ book have left out this type of depreciation from their calculations for capital gain.[?] [:(] [:O]

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