Can anyone help me with this?
I am keen to find out whether I should sell my investment property, i.e. realise the equity, rather than accessing it via refinancing, as I have now done in preparation for my next investments. The figures on my IP are as follows:
It was an IP from day one (I never lived in it)
July 2000 purchase price $280,000 (plus closing costs)
Estimated current value $430,000 (less selling costs)
Current loan balance $205,000I understand that although realising a capital gain might mean fewer funds overall to put down as deposits on properties than refinancing, it would improve my cashflow position as I would not be paying interest on that amount. This would in turn improve my serviceability and therefore make lenders feel more secure in lending me even more funds. Can you comment on this?
Something to add to the equation is that I realised a $20,000 loss in share trading a couple of years ago and this loss can be carried forward and used to offset any capital gains tax liability. What I don’t know is whether you apply the loss to the capital gain before or after halving it (property owned for more than one year)?
The difference would be as follows:
Assumptions:
Income tax at 29%
No depreciation
Selling costs of 3% therefore gross proceeds 430,000 * 0.97 = $417,100
Closing costs of 5% therefore purchase price was 280,000 * 1.05 = $294,000
Capital gain therefore $123,100Apply loss before halving:
123,100 – 20,000 = 103,100
103,100/2 = 51,550
51,550 * 29% = 14,949.5 tax payableApply loss after halving:
123,100/2 = 61,550
61,550 – 20,000 = 41,550
41,550 * 29% = 12,049.5 tax payableSo I stand to make either 417,100 – 205,000 (loan balance) – 14,949.5 = $197,050
or 417,100 – 205,000 – 12,049.5 = $200,050In practice I have claimed a little depreciation so the tax will be a little higher (lower cost base so greater gain).
Besides all this, I am in two minds about selling the Manly property as even Steve McKnight says you should have some of your investments in growth assets. The property is cashflow negative by only about $2,000 pa, but this is only because I reduced the loan balance down to 73% of the purchase price (69% of purchase price + closing costs) i.e. I’ve thrown lots of cash at it. On the other hand I can’t see much growth happening in the next three to four years, so it makes no sense to be cashflow negative.
Kind regards,
Michael
Dear Michael,
I’m no expert but I believe if you sell your property and realize a capital gain of roughly $120000 the government will be very interested in you. They will add this amount of gain to your taxable income and tax you at the appropiate tax bracket in your case 47 cents in the dollar. So after you minus your capital loss on your shares and then half your capital gain you are looking at an approx tax debt of $23500. I think that is roughly correct. It does depend also on how much you earnt in the financial year of the property being sold. I only wish they would have taxed my wife on the capital gain she made in her tax bracket ie she is in a very low tax bracket but the capital gain pushed her up through the tax bracket. The Govt is good it takes a slice of the cake when investors take all the risks and have a win but when we lose it doesnt help until we win again.Martin
Why sell an appreciating asset. Especially if its only costing you $2000 of which you get half back from the tax man. Dont listen to all this stuff about selling a growth asset like this for a postive cash flow property in a regional area.
After all its in Australia’s largest city and Manly to boot. You should be looking at buying more properties there in 3-5 yrs time than selling now.
Your perspective should be on 3-5 yrs time not ve+ properties with limited growth potential. To make $100k you need about 50 properties to make $2k a year. Imagine the hassles in running 50 properties. Not to mention repairs, lost rent, property managers.
If your still not convinced, go read any of the Peter Spann books.
Dear Martin (Brisbane 04),
I pay tax at 29%, however much I earn, as I am a non-resident. On the other hand my Australian income is taxed from the first dollar ie I have no tax-free threshold nor lower bands of taxation.
So I believe my figures to be correct. I am just hoping I can find someone to confirm I have done the calculations correctly.
Kind regards,
Michael
Dear Yack,
I only get 29% back from the taxman (see my reply above to Brisbane 04 (Martin).
What do you mean by “ve+ properties”?
Have you read Steve McKnight’s book? I ask this because you seem dead set against his philosophy.
I confess to not having read any of Peter Spann’s books, but I believe he takes the opposite view to Steve, namely that you should go for capital gain and negatively gear. I have read another book on the subject by Sean O’Reilly “Anyone can be a Millionaire”.
At this time I believe it is better to go for positive cashflow. I agree with your timing for buying growth properties again in the future. The question is how best to use available cash/equity in the meantime.
Kind regards,
Michael
Hi Michael,
Where are you from? What made investing in Australia look good for you?[biggrin]Martin
Martin,
I used to live in Australia and acquired Aus citizenship. I like it in Australia and know the market better there than any other country – that’s my only reason.
Do you know of better places to invest in property? I saw some posts mentioning Canada.
I also saw that Steve McKnight is investing offshore. Do you know where? Do you know how one can find out? (I am still new to this site)
Kind regards,
Michael
Hi Michael
I think you have to take any losses off the gains before halving and then adding to other income.
I also tend to agree with Yack, Manly is a very good area with good long term growth prospects. I would not sell just to buy another property.
Terryw
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Hi Michael,
Where are you living now? As for better places to invest, I believe Australia at present is difficult. I used to be able to find properties that were cash flow positive/neutral with good chance of capital growth. These properties are much more difficult to find. I’m currently looking at New Zealand.[biggrin]Martin
Martin,
I work on yachts in the Med.
New Zealand does sound like it has some fantastic opportunities, though I heard you can only generally borrow up to 70% of the value of the property. I think interest rates on loans were higher too. Can you confirm?
I found the answers to my question re CGT on the ATO’s website as follows:
“capital losses must be offset against the capital gain before the discount is applied”
Kind regards,
Michael
Hi Mike,
I fully agree with Yack and Terry – why sell an appreciating asset and especially one in Sydney – which tends to lead Australian property cycles.
If cashflow is an issue consider the use of depreciation and take todays dollars today.
It would also seem that you have neglected the 2.5% vendor tax that is now in place in NSW which will further reduce your gains – and finally I suggest a discussion with a broker as you may well be surprised by the amount you are able to borrow even under your existing circumstances.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Give it up Derek, Yack, Terry….
The sooner you “smart boys” realise that more and more people with the same views as Michael are going to be coming out in droves, the more enjoyment you will get from reading others posts trying to talk them into doing what YOU and I know has worked for decades!!!
Personally, I’m sick of trying to talk sense and breath life back into a lost cause!!!
So Michael honey, go ahead sell the appreciating asset, don’t wait, do it now while you can still get a lesser price, after all it’s only money!!!! [blink]
See you at the finish line sweetpea!!! [biggrin]
Jo
Originally posted by Michael King:The property is cashflow negative by only about $2,000 pa.
Another point that you may want to consider is the property has grown in value by $150K (and compounding) in 4.5 years and currently costs $2K per year or $40/week.
$40 buys ~2 pizzas – makes the property pretty cheap to me.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Michael,
Do you declare any income in Australia to be able offset the rental loss on the IP ?
If not, then all your losses are also capitalised and can be offset agains any gains if you sell.Also, do you have another market that you wish to invest in? eg.. overseas, closer to where you are residing?
If your plan is to invest further in Australian property, then you can improve your servicibility by utilising a Cashbond or Annuity, which can be purchased against the equity you have built up in the property.
I would suggest you speak to a good broker, to secure finance to tap the equity, and also to Steve Navra regarding the cashbond.
You may well be able to purchase more property by simply rearrangeing your financials..
KP
Originally posted by kp:I would suggest you speak to a good broker, to secure finance to tap the equity, and also to Steve Navra regarding the cashbond.
Hi Kp,
Were you at Steve’s course last year?
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
I missed it Derek, but heard it was good.
Will be trying to catch one in Brisbane next year.
A couple of forumites on SS have given me in depth info on his strategy and it seems reasonable, but bears further investigation on my part.
Hi Kp,
Certainly something to have up the sleeve and addresses the serviceability issue that some people may run into.
Using Steve’s share fund at the moment to keep all available equity working – and working very nicely for me.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Thats a good news story if ever I heard one Derek.
Well done and congratulations.
For Michael, I wanted to add: unless you have a need for the equity (hence money) from your property, for some purchase elsewhere, or for some personal requirement, then I would be hanging on to it and not selling.
At least not till you investigated all other options and possibilities ….eg…you may be able to secure a positive cashflowing investment to offset the negative property you currently have., thus leaving you neutral, but with two properties or ivestments working for you….just an idea…one of many.
KP
Derek, Yack, Terry:
Many thanks for your advice and concern regarding my query as to whether to sell my Manly property. I agree it is a good long-term investment. It may be, however, that we see no appreciation in the next three years. If this is so, even taking into account all the costs of sale (and purchase of another property), it may make sense to buy and hold cashflow positive property for the next three years, then buy back into a growth asset such as a property in Manly.
May I respectfully ask whether any of you have actually read Steve McKnight’s book?
Monopoly: you seem very scathing about cashflow-positive property investment. I agree with you that capital growth has worked as a strategy up until now. I have done very well out of it myself. The question is how best to use your cash and your equity, and whether your unrealised equity should be converted into cash (by selling the property), thus locking in your capital gain and also reducing your interest payments if you were to buy a property of the same value the next day. The main benefit, however, is that your serviceability improves and you can then borrow even more funds. Have you read Steve’s article on this subject?
KP: re your 11/11/04 post:
I have no other income in Australia. As well as losses being able to be capitalised and offset against any gains if I sell in the future, I understand they can also be carried forward to offset income in future years.
I was looking at investing in Belgium, but have chosen to stick with Australia.
I didn’t know about a Cashbond or Annuity. I have just refinanced the Manly property to access the equity. I have an offset account which works like a line of credit, but at home loan rates.
Who is Steve Navra?
Yes, I am able to purchase up to about $400,000 of new property, depending on the cashflow of this new property.
Kind regards,
Michael
Originally posted by Michael King:I agree it is a good long-term investment. It may be, however, that we see no appreciation in the next three years. If this is so, even taking into account all the costs of sale (and purchase of another property), it may make sense to buy and hold cashflow positive property for the next three years, then buy back into a growth asset such as a property in Manly.
Hi Mike,
In an earlier post you indicated you haven’t yet claimed any depreciation on this particular property in order to minimise any future CGT liabilities.
You (and your accountant) may not be aware of the following “If an investment property purchased after May 13, 1997 is sold, depreciation eligible to be claimed on the building must be factored into CGT calculations whether it has been claimed or not.” I suggest that you grab a copy of the ATO’s CGT guide and read section 6 (from memory) as you might as well claim your eligible deductions given the ATO’s position as above. If this ruling changes your position you will still be able to ask the ATO to review our past four tax returns.
This will serve to improve your cashflow. However having said that I still subscribe to the theory that you are better off hanging onto the property as very very good long term growth investment.
Sure you can sell the thing incur your CGT, selling costs and 2.5% vendor duty, purchase some cashflow properties (incurring more stamp duty) and then buying when you believe the growth phase returns and incur more stamp duty, cover agents costs and so on.
These total of these sums will accrue into considerably more (largely non-deductible) outgoings than a $2000/annum ‘loss’ – to me the issue is a no-brainer.
I subscribe to Peter Spann’s three reasons to sell – you get an offer too good to refuse, to sell off a dog, or to put your money to better use.
If you are passionate about buying a cashflow positive property or two consider using your leveraged equity to do this.
May I respectfully ask whether any of you have actually read Steve McKnight’s book?
Yes
I didn’t know about a Cashbond or Annuity. I have just refinanced the Manly property to access the equity. I have an offset account which works like a line of credit, but at home loan rates.
Who is Steve Navra?
Steve Navra is a licensed financial advisor who believes that growth property is the core of an investment portfolio with income from shares, and maximised use of all available dollars, being used to optimise portfolio performance.
Steve is based in Sydney with offices in Brisbane and Melbourne and can be found at http://www.navra.com.au
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
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