Hi Again.
My husband a & I own a negatively geared property in Sydney’s West. We have approx $180,000 in equity and are thinking of selling to finance cf+ properties.
I have done a lot of homework on some areas and we are now ready to take the plunge & sell. However, I spoke to my accountant, who I have been seeing for many years and trust, and he is having an absolute cow about this decision and has put the fear of God into me!
His argument is something along the lines of that it all sounds good on paper with the actual rent being more than the mortgage repayments. However, once tax time comes around I will end up paying a large amount of tax and will be lucky to make $200 after tax profit on a property I have calculated to have a COCR of 8.5%.
Now I don’t know what to do. I thought I had the courage to take the plunge, now I am wavering. Any advice????
Lisa [:0]
PS. I am not hugely interested in CG (it is an added bonus), mainly in CF+ to reduce the amount of time I have to work.
Why would you be paying a large amount of tax? At most it would be 48.5c in the $. To leave you with a profit of only $200, you would be making a profit of only $400 for the year anyway, which is hardly worth it.
You would be paying CGT on the place you sell unless it was your PPOR.
I think you need to realistically assess your $$ profit, not %, and then work out your marginal tax rate on that.
Cheers
MelLisa
Why sell why not utilise the equity and purchase + cash flow properties as well. That way any profit will be offset by any of the deductions you have from your -geared property.
If you don’t want to go to the minimal expense of establishing a Trust purchase the property either solely in the name of the lowest income earner or as “Tennants in Common” using a 99/1% share allocation.
Win win solution. Remember think outside the square and you can always change accountants.
Cheers Richard
richard at fhog.com.au
http://www.fhog.com.auThere is no such thing as a problem.
Just a solution waiting to be foundRichard Taylor | Australia's leading private lender
Thanks Mel.
It was our PPOR until December last year, so we would (thankfully) avoud CGT.
Its hard to wrap my head around his argument (being a non-accountant), but what he basically said that adding the rental income to my existing income, then deducting the allowable expenses for the property would leave me with a tax bill not much under what I calculated as my total cashflow income from the property.
I just want to make sure I’m getting it right.
Lisa, is your accountant taking into account that you would have already paid tax on your earnt income?
For example, if you earn $20K, you pay tax of $2380 (roughly).
If you then add $12K in rent, less interest of $8K, and other expenses of $3K, your ‘profit’ is $1K. Add this to you taxable income, and you would only pay tax of $300, leaving you with $700 free and clear.
Of course, if you get a quantity surveyor in, you can also claim some non cash deductions, so could end up with ‘expenses’ equalling income, but still pocketing that whole $1000.
Cheers
MelHi Lisa,
I just did exactly the same thing you have with my accountant, telling him of the plans to sell our house and invest in +ve cashflow properties. My practically laughed in my face and wasn’t open to the idea at all. I felt like an idiot and didnt appreciate being spoken to like a fool. I am looking for some other opinions from other accountants now. Perhaps if they all say the same thing my mind may be changed but my gut feeling is that this is a good thing to do. Let me know how you go.
Good Luck
Rachel.Hi Lisa
I understood that you want +ve cash flow so you can work less in your job. That being the case, any profit you make from the properties would be offset by your reduced income from working less, so your overall taxable income would be the same. Wouldn’t it?Don’t let one “expert” undermine your confidence. Try another accountant.
Good luck
JudiHi Lisa,
If you are paying more tax it also means you are earning more – hey no problem so far.
I wonder if the core of your accountants objections, notwithstanding the above comments, is the apparently relative ‘small’ profit you stand to make.
Just posturing and trying to offer an explanation.
Derek
Hi Lisa,
I think you had better ask our accoutnant for any references of people that they are doing the books for that are structured with positive cashflow properties…. If not …. I would seriously consider looking for a better advisor … they normally get cranky that you are rocking the boat … (normally because either they actually believe they are doing the right thing by you and have never been educated in the positive cashflow model) … or they know that they will potecntially be taking a pay cut from doing your books as they will not be able to wean you into thier commission based diversified funds etc.
Consider this …. if you take all the smoke and mirrors away… and look at it all logically. you have already paid tax once on the money you have invested in your property… and you continue to pour in post taxed funds into it week after week….. then you get your big tax rebate… at the end of the year … or if you are clever … every month (Via the correct forms with the ATO) So in essence let us say you had placed $5,000 into the property out of your own hard earnt cash…. that has been taxed at 47% already….. then you get taxed on the income that you make and nett it all up against your contribution…. would it be better if you were just getting an actual income off the property and then paying tax through that …. it does not effect your cashflow every month and it means that you do not need to worry about having to make your paycheck to cover the negative shortfall on your -cashflowed property……
Anyway… food for thought!
Cheers
Kiwi
[]Thanks Guys.
I’m with you Rachel. My gut instinct tells me this is just common sense! Why should I be paying money out of my own pocket for a supposed capital gain I can access when I retire and sell the property???
Does anyone have advice on whether it is better to pay interest only or to pay principal & interest?
Lisa
[^]Lisa,
I pay interest only for all investment loans. Reduces outgoings, frees up more funds to invest in other IP’s.
I negative gear all properties and their choice has been primarily for solid long-term capital growth.That will in turn create the equity.I guess I am in the early phases of my ‘IP career’ and am trying to build my protfolio, so interest only allows me to build savings to purchase next one and so on.
However, if you are purchasing +ve IP’s, then I think (not that I am an expert in this area), you would pay off P&I, becasue all other things being equal, you probably won’t get the same level of capital growth. Therfore to increase equity you would need to pay off principal as well.
James
Lisa,
Dont sell you house.
If you want to buy CF+ property, use your equity (if you can service it)
It would be a mistake to rush out and sell your property to by 4 cf+, have patience, learn to swim first.
Otherwise you could end up in finacial trouble.
You have already made $180,000 dollars, so why sell
Don’t let greed get the better of you.
Remember slow and steady win the race.
Your accountant is probably not in a position to give you advice on property – just on the tax aspects. An accountants dream is to reduce peoples tax, so he must be concerned about his clients doing things to pay more tax. But this is a narrow view and there is more to it.
However, I would be wary with buying cashflow positive property at the moment. It depends on where you are buying, but some of these towns have had an average of 1-2% pa growth for the last 10 years or so, and then recently boomed with 10 to 20% growth. This may mean that prices may even drop or stablise for a long time to come. So please be careful and research fully.
I myself sold one of my Sydney properties to invest in cashflow positive properties. Now I wish I didn’t.
Terryw
Discover Home Loans
North Sydney
[email protected]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
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