Hi All,
I have a question regarding about Negative Gearing. In Property Investment Magazine there are people who say they have there total income negative geared and they dont pay taxes!
Does this mean the following for example:
John income is 100,000$ a year but his total investment cost is also 100,000$ a year. So at the end of the financial year he gets approx $50,000$ from tax man?
Thanks
Bigbelly.The answer is he get back whatever he paid (not sure about the medicare levy though).
Your example is not realistic though
1) noone earning 100k is paying 50k tax
2) a 100k shortfall is massive, not affordable for someone on 100k/yr unless their partner is also earning big bucks.Basically John would not have to pay tax as income less deductions for investments gives him 0.
On $100k this year 2005-2006 you only pay $32050 tax.
ChrisAll post are IMHO.
Hi,
Thanks for your reply. Sorry the example was not the best but it got the picture
So he would get 32500$ in tax back. So in reality he loses only 67500.
Thanks alot. The reason was asked was to understand when income start going over the 125K mark. And how Negative gearing will make investment a bit more efficient.
For example:
John makes 200K a year…for example sake, he want to negative gear 90K. So he needs to have enough investment to lose 75K a year. Say he then have 5 properties each costing 400K and getting rent about $350 a week.
Borrowing: 2000K Income: 91000
Interest : 160K
Misc : 20KSo John loses 89K that year but gets back approx 40K from the tax man. But he will have the unrealise capital gains.
So 2000K grows at a low rate of 3% p.a. he will make 60K a year.
By investing 89K a year he will make 100K (inc 40K for Tax) a year!
This is what my interpretation. is..if this is incorrect please correct me, cause it would start making sense to negative gera for high earners.
Bigbelly
this is not advise, please investigate and readup yourself.
If the person borrowed money to do so improvements on the house they could also claim depreciation which would reduce their tax but it would reduce their cost base in regards to CGT at a later date when selling.
Hi Bigbelly,
Assume a person is on $100K as per your example they typically pay around ~$32500 (as per Chris’ eg). Another way to look at this is the tax payer takes home $67500 but acquires no assets as per this example.
Assume two taxpayers buy a negatively geared property that ‘loses’ $20K over the course of the year.
Person A – On a starting salary of $100K (as per your example) this taxpayer will only be taxed on $80K which sees an annual tax bill of ~$23300. In effect this taxpayer has lost $20K and saved $9200 in tax.
If Person B has a lower salary, say $50K and this taxpayer also buys the same property. Normally this taxpayer would pay tax of ~$11200
He also ‘loses’ $20K so his taxable income is reduced to $30K upon which he pays ~$5200 tax – a tax saving of around $6k.
As can be seen the higher paid person ‘enjoys’ greater tax a greater return (in tax dollars saved) than someone in a lower bracket.
Of course it goes without saying that good selection of growth properties should offset any losses through an increased asset base. Otherwise the wrong decision making process is being employed – tax savings are a potential biproduct of investing via negative gearing they should not be the sole reason for investing.
Hope this helps a little.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Hi Bigbelly,
…………..lose 75K a year………………..If John really wants to loose this much money then I am here to help!
I’ll bring down my biggest bucket and he can just pour it in.
And I’ll come back each year to help him if he want’s me to! No questions asked.
Just let me know would you!
But have a think about it! There may be a better way to do business than to throw it away.
Is John trying to make money or is he trying to save tax?
The answer will determine the outcome.
“Why?” is more important than “What?”Harley
PS Look at today’s tip – “You should never pay more than 30cents in the $ in income tax.”
Surely tho , in such a scenario , you wouldnt be losing 75 k as much as craeting 75k worth of equity in your neg geared property ?
Al
Hi,
Thank you for your response. I just trying to understand the possible gains of negative gearing, when income reaches the 48.5% tax bracket.
What to do with 100K at 48.5%.
Say over a 5 year periodScenario 1.
Interest Only Account:
* 51500×0.054 = 2781pa. Give government another 1400 tax! (No Compounding)
* $257500+1400+2800+4200+6600+7000=$279500.
* Gain 22000 after tax.Scenario 2.
Invest Negative geared.
* 5 properties bought at 300K each with 80% leverage.
* 1200000x.003x5years=180000
* Lose 500,000 for the 5 year period. But get 242500 from tax man.
* $242500 Cash and 180000 unrealise equity value?
* Gain approx 150K in 5 year in unrealise value but if you do CGT … then it will about 110K gain?Am I missing something here? It appears that John really invest 15K and makes 110K. Now this to me is not right, did I miss a calculation somewhere?
Thanks
BigbellyOriginally posted by Bigbelly:Thank you for your response. I just trying to understand the possible gains of negative gearing, when income reaches the 48.5% tax bracket.
This does not mean the whole $100K is taxed at 48.5% as there are taxation thresholds as follows. In the current year (0506) according to the ATO you will pay $28200 tax for the first $95K earned. Thereafter you pay @47% for all $1 in excess of $95K.
In total this means you will pay a total of $30550 in tax in the relevant financial year.
What to do with 100K at 48.5%.
Say over a 5 year periodI assume you mean you are earning $100K each year over a five year period. Is this correct?
You do not seem to have allowed for living expenses in your calculations. Even though your take home pay is $69450 you do need to allow some discretionary expenses. But lets use the $51.5K as investible money so the following figures remain consistent.
Scenario 1.
Interest Only Account:
* 51500×0.054 = 2781pa. Give government another 1400 tax! (No Compounding)
* $257500+1400+2800+4200+6600+7000=$279500.
* Gain 22000 after tax.Your calculations have not made any allowance for reinvestment of income and the compounding that occurs therein.
Your second year of income is now $100K + $2.8K in interest and you would be taxed on $102800 (real tax rate $31866).
In effect & using ‘real figures’ you gained $2781 and lost $1316 to the tax man.
Scenario 2.
Invest Negative geared.
* 5 properties bought at 300K each with 80% leverage.
* 1200000x.003x5years=180000
* Lose 500,000 for the 5 year period. But get 242500 from tax man.
* $242500 Cash and 180000 unrealise equity value?
* Gain approx 150K in 5 year in unrealise value but if you do CGT … then it will about 110K gain?In an effort to keep the illustrations simple.
Someone on a taxable income of $100K should be able to borrow $600K with a good broker alongside them and will be able to purchase 2 properties at $300K.
Some equity would, in most cases, be required to get them started in property investment in most cases so allowance needs to be made for this.
At a rent return of 6% these two properties would cost the investor $64/week after allowing for ITWV. The tax savings would see this same investor reduce their annual taxable income to ~$75K and save around $12K in tax.
Assume the properties grew consistently by 7% per annum at the end of 2011 these two properties would have grown in value to ~$792K. A tax free gain of $192K
If the same property consistently $grew by 10%/annumat the end of 2011 they would be valued at $890K. A tax free gain of $290K.
Obviously there are a number of assumptions that can be challenged and further clarification is required. But I hope this shows how negatively geared growth property can be a good investment.
Add additional properties and ???????????
Am I missing something here? It appears that John really invest 15K and makes 110K. Now this to me is not right, did I miss a calculation somewhere?
By the way are you confusing taxable income and cash or equity or ………?
Hope this helps and doesn’t confuse.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Hi Derek,
My example refer’s to every dollar after the 100K mark. Ie John makes 200K. 100K is for normal expenses and the other 100K for investment.
I am trying to keep the case simple. Thankyou Derek. I can see the fruits of negative gear investment and the pitfalls. However I believe a well planned structure will in many case lead to a fruitful investment.
With my original understanding confirm, this has given me more courage to go beyond 2 IP. I love the idea of Positive as well but finding it needs alot of time and patience.
Thanks
BigbellyFor example say we have 18 ip’s and with all of the interest, management fees, rates and body corp fees we go back about 40k. Add 20k in depreciation on average and we can earn personal income of 60k without paying tax. Anything above this is then taxed as normal.
Any negative or tax credit is carried forward so when we sell an IP and have say $16k carried forward and about $60k in actual deductions its then nice to sell the odd IP make $160k cap gains then pay tax on 50% after holding IP for a few years. So $80k cap gains and $76k negative from deductions means I make $160k and still get a $zero tax bill as having earnt $4k I pay no tax as this falls under the tax free threshhold for the year.
Derek this is how I see it. Do these figures seem right? This way we remain negative, and the cash injection from the cap gains covers our shortfall is real $$ whilst still minimising tax.
Then I help people as well get into property for living $$. Just wanted a second opinion.
****This is an example only and should not be mistaken for true figures.****DD
Buyers Agent (Dip Financial Services(FP)
Don’t sweat the small stuff,and it’s all small stuff!!
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