Live off Equity ?

The tax implication of living on the equity is that the interest paid on the increased borrowings is not tax deductible as it is not being used for the purposes of producing income. This was covered in Australian Property Investor Magazine.

Option 1 – If you sell some of the properties with the most equity and cop the CGT tax you can pay down the other loans that are reducing your cashflow. Say you have a house worth $500,000 on a $100,000 loan and you sell it you make $400,000 profit and use the 50% cgt discount for holding the asset for >12 months . So you have $200,000 taxable Capital gain. Your marginal tax rate is probably say worst case 45% so you pay $90,000 in tax. You now have $310,000 to pay down some of your other loans to get them to a positive position.
So you pay tax on the positive income at your marginal tax rate that is probably would be 30%. (you can check the tax rates at (http://www.ato.gov.au/individuals/content.asp?doc=/Content/12333.htm). As an example say you lose $10,000 a year in negative gearing so you can only claim the marginal tax rate of say 30%. So you get your 30% or $3000 but you lose $7000 a year. Now take the scenario of being positive by $10,000 a year. Oh no you have to pay tax so $10,000 * 30% = $3000.
You have a $7000 loss with negative gearing or a $3000 loss with positive gearing. I haven't factored in the land tax you would incur if you own a lot of properties in the one state. When I say own you really only control the properties in a negatively geared situation the bank really owns them you just get to pay the land tax for the properties.
You may have less growth but the point is with negative geared you are solely relying on achieving capital growth where as if you pay down loans you become in a better financial position to be able to purchase future properties and have the passive cash flow to pay for any new loans without hampering your lifestyle.

Think about this
How many properties can you own that are positively geared?

How many can you afford to own that are negatively geared as you can only negative gear on your taxable income over $34,000 to $80,000 at 30% or $80,000 to $180,000 at 40% and at 45% for over $180,000 ? Don't forget the land tax costs !

Hi Erik,
( From another expat )

Well done, looks like you have built a nice future for yourself and the family.
We too have been debating the cashflow versus LOE.  Having built a predominently commercial property portfolio we are now 5 years away from our planned retirement date and in a quandry. Pay down the commercials and pay the tax man his 30% pa but a comfortable income ( all be it with the slightly higher risk associated with comm ) or concentrate all efforts for the next 5 years building good located residential side for capital growth and LOE.

I would like to say however that we are at present getting a LOC extension for increased equity in the residentials and the banks and their valuers are far from as accomodating as they have been in the past, well dragging their feet. Sure it will proceed but at a reduced level than we had anticipated and taking considerably longer to finalise.

NOT sure I would enjoy these periods during retirement. And I really think we are a little blessed with a healthy economy and this really is just a soft patch, thankfully I am not trying to find some retirement funds in the UK or USA.
Cheers