My wife recently went out to lunch with some of her girl friends (a minthly thing she does) and they got to talking about property. We currently have 4 B&H’s with another 2 coming on line and no one else knows about.
She has read RDPD and 0-130 and is very switched on to paying more tax due to having more +ve income.
Anyway, she was listening to one of her friends go on about how she had an IP and really wanted to get another but could not afford it.
She said that the one she has got she has had for a while and the rent has been steadily increasing and the loan decreasing until now it was cash flow +ve. Now guess what she did? Yup dropped the rent a LOT to make it cash flow -ve again so she could reduce her tax. Seems she does not to pay any tax. I wonder why she can’t afford another IP…..duh?
At this stage my wife apparently had to leave the room to stop her screaming obsenities at her friend. I was just as dumbfounded when she told me.
And guess what my wife’s friend did for a living until recently when she went on maternity leave?
She worked at a bank!!!
This is how stooopid some people can be. Believe the -ve gearing hype so much they have to drop rent to save tax.
Having said all the above, this probably should have gone into Forum Fun, this is just a joke.
It is truly amazing how many people dont want to move to a higer tax bracket because they THINK they will be worse off. I’ve given up trying to help peolple understand if they have this idea firmly implanted.
Sad but true, one of the people I work with told me he has to negatively gear because he pays too much tax.
Whilst it’s pityful that most people have such closed minds to think making a loss is a good thing, it’s good for people like us as that leaves the positively geared properties for us to buy. [:0)]
I have known several people over my working career who have said, “Oh no, I can’t work overtime tonight, because that might push me into a higher tax bracket…” They always think that if you earn $1.00 too much, all of your entire income goes into the next bracket, and then you’ll be worse off than before you did the overtime!!
Surely ANY extra money taxed at 50% is better than NO extra money at all??
I am sorry to say this..but my mother does the same. (She hasn’t reduced rent…..cus I manage her properties). No amount of screaming, yelling or logic can deter her from trying to achieve neg gearing.Even though it would be nice for her to have some extra income during her retirement!
Negative gearing can not save you money. By it’s very function you have to lose $1 and hope to get back at most about half that! You are still in the hole.
Negative gearing will only pay off if you have a guarenteed capital growth. Easy to predict now, but could head south at any time in the future, anyone’s guess.
I’d rather have something I know will happen now (+ve cah flow) than hope for something to probably (or possibly) happen in the future (capital gain). Manage to get both and it is a double bonus!
I agree, I don’t see the problem. If you make the money, pay the tax. I’d rather have pay some to the Govt than not have any extra at all. I wonder what makes people so Tax adverse….[][][8D]
Here is a quick example on why negative gearing is soemtimes VERY good, depending on the persons situation.
This technic can only be used on newer type properties where depreciation is applicable.
The person that would be interested in this would earn more than $75,000 p.a. and doesn’t want to have more than 4 or 5 IPs. (However keep to the 3 most important ruls of PI Location – Location – Location. and maybe another one “Floor plan”.)
OK so let’s do some sums.
Scenario ONE
Earnings $75,000
Taxable income $75,000
Tax $22,600
LEFT AFTER TAX $52,400
Scenario TWO
– One negatively geared property
Rent = $13,000
Interest + Expenses = $16,000
Depreciation = $7,000
So this property cost’s you $3,000 p.a (i.e. Negatively geared!)
Earnings + rent = $88,000
Taxable income = $88,000 – $16,000 – $7,000
= $65,000
Tax = $17,900
LEFT AFTER TAX = $54,100
************************
THEREFORE having a Negatively Geared property will ACTUALLY save you $1,700 p.a. in tax!!
This is actually one of my favorites because these properties are normally “high growth” properties. This technique even though it is negatively geared is also known as “positive cashflow” because AFTER tax the property saves you money.
So please, STOP insinuating that negative geared props are ALWAYS bad. For some people they work great!
(Yes, and I will say it again. You will not be able to purchase more than 5 properties using this method as it will then become really negatively geared. However for “some” people this will work fine.)
But when the great crash comes, the dow is one tenth of what it is today and 1929 looks like good times I for one would rather not have the debt.
How many forumites have vivid recall of October and November 1987 and its effects on property prices?
Start reading the court cases on property owners defaulting on settlements. The courts are being ruthless with the defaulters. A day is a day and a deal is a deal.
The inflated credit binge will come to an end, its not a matter if but when and all these high negative geared holders will fully understand the concept of leverage works two ways.
Then the 11 second rule will apply to prime Sydney properties.
My uncle actually tries to make less money so that he will not have to pay as much child support, it is crazy, he still is gaining cash if he works more hours, he just doesn’t understand!
The “positive cashflow – negative gearing” only works *if* you have a good income AND not too much time.
And the risk is that you may loose your job …
The economy is actually very strong right now and is predicted to continue. Unemployment hasn’t been so low for a long time. But then again you never know…
The thing is, if there is a big depression and a lot of people loose their jobs then this will affect your everyday Mum and Dad who are renting your positive cashflow properties and they won’t be able to pay your rent either.
So whether your positively geared or negative, you will be in the same boat, as far as I am concerned. (OK lets discuss it if you don’t agree, I always change my thoughts when I am wrong.)
However property is safer than shares anyday if you know what you are buying. Because people still need a roof over their heads!
You say:
quote:
How many forumites have vivid recall of October and November 1987 and its effects on property prices?
What happens if you DON’T sell, and wait for it to pass?
quote:
The inflated credit binge will come to an end, its not a matter if but when and all these high negative geared holders will fully understand the concept of leverage works two ways.
People buying +ve geared properties are also “leveraged” to the hilt …
quote:
Then the 11 second rule will apply to prime Sydney properties.
Agreed! even though I doubt this will ever happen…
BTW what types of property do you invest in xyzzy?
I am in the higher tax bracket, and I would benefit by having 1 or 2 neg geared pptys.
I won’t do it, because I am trying to build up a large portfolio of pos cashflow pptys, and our short term goal is to sell our business, and live more off our cashflow.
I am all for +ve cashflow investing, but I do understand that -ve geared can be a very useful investment tool, if you are in an upward market.
Even though negative geared property can save you tax money and thus you get $1700 (as per above example I think) back into your pocket, you are actually worse off. Every dollar you depreciate lowers the property value, so when you come to sell you pay higher capital gains tax.
Example.
Property purchase cost $100,000
Depreciating $5000 per annum for 5 years.
You sell said propery for $150,000 after 5 years. Normally you would pay Capital Gains tax on $50,000 at a rate of 50% (as you’ve held property for more than 12 months). Which means you would pay CG tax on $25,000. BUT because you depreciated $25,000 over the course of the 5 years ($5,000 per annum), you actually pay CG tax on $75,000 at a rate of 50%.
Bottom line, instead of paying $12,500 CG tax upon selling you are actually facing a tax bill of $18,750. That’s $6,250 more.
At least that is my understanding of it so far, after all I’ve learned.