- Hey all,
Im undecided what to do at the moment as i have a few problems so i need some advice on what i can do.
At the moment i have one investment which the rent pays the mortgage so im not getting negative gearing out of it.I currently rent my dads house at a failry cheap rate.And i have some spare cash about 50k i can splash around to use.
Question: What should i do?
Should i buy a cheap investment e.g 200k or expensive one at 400k And should i buy an apartment or house.Does anyone reccomend any other investments as shares are not good at the moment?
How can i compensate for not getting negative gearing?Hi Barnseee,
First of all, if your first investment property has become positive cash flow, you should be happy – making money is a good thing (that's why you're investing, right?).
I think the best thing to do would to be buy cheap and add value through a renovation and sell quickly. As buying big and holding may turn out ugly in the current economic climate.
I'm sure others on the forum will have more ideas – just be weary of the growing number of pessimists on the site.
All the best,
Lance
Yes of course,
But my delema is that this year i will have to pay tax instead of using negative gearing and getting the tax back.
Yes maybe buying cheap then renovating and renting is the way to go.
Why not look at buying a propery as your PPOR and receive the benefit of the FHOG.
Not sure which State you are in but that could be circa $17K for a 2nd hand property.
Make the loan interest only with a 100% offset and put down the minimum of deposit.As long as the services are in your name and the property is not offered for rent the property could stand vacant for the first 6 months whilst you renovate it and if defined as you PPOR you will have satisfied the FHOG requirements.
After 6 months you look to rent the property out as an investment property.
Secondly you look to buy a separate property as an IP and lok to prepay the interest on the loan for a year upfront. You use the FHOG as your deposit or funds to cover the interest.
This will give you the years interest as a deduction in this year and then come next Tax year you can decide whether you repeat the exercise or change them both to paying interest monthly.
Richard Taylor | Australia's leading private lender
Hi Richard,
I didn't know you could fulfil the requirements of the FHOG without "living" in the property, as long as you're renovating it during that time. That could make things very beneficial for myself as I am yet to buy my first property.
At first I thought chasing this boost in the FHOG would be a waste if property prices continue to drop. i.e getting a $14K/$24K FHOG and losing $50K in the value of the property in the same year – there's practically no point.
But if what you say is feasable in NSW then that could allow me to enter the market a lot easier, complete a renovation during the first six months and then sell for a tidy profit.
Surely there must be certain conditions I'll need to check out before hand.
Could you please point me in the right direction?Oh and Barnseee, you should look further into depreciation, which is another tax advantage. And using trust structures to reduce amount of capital gains tax you pay, i.e. if the trustee of the trust is a company, tax will be capped at 30% on the dollar.
Check out this online article on trusts: http://www.propertyupdate.com.au/articles/149/1/Trusting-Trusts/Page1.html
Cheers
Freelance
The property would need to be considered your principal place of residence so you have to have the services etc in your name.
You need to occupy the property for a period of 6 months in the first 12 months after settlement.
Each State will also have FTB Stamp duty concessions which may need thinking about in order to satisfy separately.I would rush in and set up a Trust structure with a Corporate Trustee as the set up costs and higher loan costs i.e interest rats and application / legal fees ec may diminiish the so called benefit.
There are many ways to legally reduce your Tax liability but everything comes at a cost.
Any Building Write Off claimed against the property wil reduce the Cost base when the property is sold so you cant have it in one hand and eat it in the other.Richard Taylor | Australia's leading private lender
Hi Richard,
Just to clarify… I understand the requirement of living in the PPOR for 6 months within the first 12 months of settlement. And that stamp duty is waived in NSW for first home buyers (sorry if I'm using the wrong vocabulary here).
What do you mean by rushing in with the setup of the Trust structure? In order to buy my first IP using the renovation method described above, I would need to purchase in my own name. Are you saying that setup costs for Trusts will increase with time? Even if this were to happen, what makes you say the benefit would deminish? Fair enough this will make a harder start, but in the long term it's well worth it in terms of asset protection (I'm not trying to sound rude here, I'm just excited about property).
Thanks
Free
Couple of points:
Many clients rush in and we set up a Discretionary Family Trust with a Corporate Trustee on the basis that they intend to buy +cashflow properties.
Then they decide that the property they are looking at is in fact negatively geared and they want to be able to claim the negatove gearing on a monthly basis. They consider a Hybrid or Unit Trust structure.
When they have signed the Contract they approach us again to arrange the finance and do not realise that in the current climate that many of the products offered are not available to Trust Structures. Most lenders want to charge upfront for their legal dept to review the Trust Deed to ensure it has satifactory borrowing powers.
Had they purchased the property in their own personal name then such restictions would not be with us.
Dont get me wrong i am not suggesting that one does not use a Trust structure for property acquisitions in fact i have 5 seperate Trusts i use for my portfolio however all i am saying is before you rush in think about what and how many properties you are likely to buy.
If you only ever buy 1 then why not consider a DFT with you as personal Trustee especially if the property is neutral or positively geared. Each client is different and individual circumstances need to be consdered when providing such advice.
Richard Taylor | Australia's leading private lender
Richard,
In my case, I intend on building a portfolio large enough to support financial freedom for myself and my partner. So I like the idea of a Discretionary Trust protecting our IP's. Eventually I would like to obtain large income producing assets. i.e. Commercial Property.
So if I set up my Trust now I will be prepared for future activities. I don't mind starting out with a negative geared property as long as it has my long term interests at heart. These losses will remain with the Trust and will be offset by future gains, making the whole thing worth while for me.
It was my understanding that Discretionary Trusts can nominate multiple Trustee's, so that would include family members, my partner, myself and a company. As long as I have nominated properly I should be able to alternate between beneficiaries at my discretion.
Please correct me if I'm not 100% on this… I'm still trying to understand the Trust concept.
And sorry Barnseee for stealing the spot light on your post.
Thanks guys
freelance2020 wrote:It was my understanding that Discretionary Trusts can nominate multiple Trustee's, so that would include family members, my partner, myself and a company. As long as I have nominated properly I should be able to alternate between beneficiaries at my discretion.
Hi Lance,
The trust can nominate as many beneficiaries as it likes, which is what I think you mean.The trust, in its deed sets who can receive distributions from the trust income, and 'benefit' from the trust. The deeds are usually set so that you can choose to distribute to yourself, your kids, your parents, nieces, nephews, and any other entities associated with you, like other companies etc.
The trustee is set at the time of commencing the trust, and can be changed later on if you wish. The trustee can either be yourself, yourself and a partner, or a company trustee, with you as a director.
The only other consideration for loss making trusts is the Family Trust Election rules. If you make a trust election, it limits who you can distribute income to in future years, to the family group of the nominated individual. (including parents, children, siblings etc)
Cheers
Hi Dan,
Yes, that's what I was trying to say.
When you said:
Dan42 wrote:The trust, in its deed sets who can receive distributions from the trust income, and 'benefit' from the trust. The deeds are usually set so that you can choose to distribute to yourself, your kids, your parents, nieces, nephews, and any other entities associated with you, like other companies etc.
The trustee is set at the time of commencing the trust, and can be changed later on if you wish. The trustee can either be yourself, yourself and a partner, or a company trustee, with you as a director.
You mean to say that the Trust, in it's Deed, will define the Beneficiaries. While there will only be one Trustee which can be defined as an individual, group, or company with the individual or group members acting as director(s)? Forgive my ignorance here, but I thought the Beneficiaries were the Trustees, but this seems incorrect. They are actually two separate things?
And I'm not entirely sure what you mean here:
Dan42 wrote:The only other consideration for loss making trusts is the Family Trust Election rules. If you make a trust election, it limits who you can distribute income to in future years, to the family group of the nominated individual. (including parents, children, siblings etc)
If I make a loss through the Trust, I will be limited to distributing future gains to family members only? So the company is kicked out so to speak?
Maybe it would be best to begin the Trust with family Beneficiaries only, and once the investment portfolio grows and contains income producing assets, create a new trust with a corporate Trustee instead. So making use of multiple Trusts as Richard pointed out earlier.
Thanks for the help Dan
Hi Lance,
You can still distribute to the company, even after making a family trust election, as long as the company is controlled by the members of the family group. eg, if you and your partner were the directors and shareholders of the company, you would be fine.
It would be best to set the beneficiary group as wide as possible, then you don't need to have the deed altered later on, to add beneficiaries. The trustee can then choose who receives a distribution and who doesn't.
Hi Barnseee,
I'm pretty new to all the Property Investing stuff, but if you're trying to negative gear a property, but still make money, maybe you could buy a smaller relatively new unit. This way, you can claim the depreciation of the unit from your tax return. You could also furnish the unit (and increase the rent) and claim the depreciation of the furniture as a tax deduction.
Last year, I deducted over $4K back as depreciation on my 2 bedroom unit, which is 9 years old. If you have positive cashflow, I think you can still claim the depreciation as a loss, which may turn your positive cashflow into negative gearing for the tax man. (Check these facts, I'm still new at all of this).
Hi Dan,
Thanks for clarifying. One more question though:
If I set a large number of beneficiaries and distribute income to unemployed or low income earners to reduce the amount of tax payable, how is this taxed income then distributed back to myself and my partner? Is it simply a matter of trusting my beneficiaries to transfer the money to me, or can this be controlled legally?
And when the after tax income is transferred to me, will this be considered a gift and therefore no longer taxable, or is it free from being taxed anyway as it can only be taxed once. i.e through the unemployed beneficiary?
Bare with me, I'm getting there
reno209 wrote:Last year, I deducted over $4K back as depreciation on my 2 bedroom unit, which is 9 years old. If you have positive cashflow, I think you can still claim the depreciation as a loss, which may turn your positive cashflow into negative gearing for the tax man. (Check these facts, I'm still new at all of this).
Hi Reno & Barnseee,
You should look up two of Steve's articles on depreciation and negative gearing:
https://www.propertyinvesting.com/depreciation
https://www.propertyinvesting.com/strategies/negativegearingDepreciation is not negative gearing, you are only writing off the value of the home (fittings and fixtures). Be mindful as Richard said above, that when you sell after depreciation you are claiming a bigger capital gain which in turn results in more tax.
Hi Lance,
Yes, the beneficiaries and trustees are two separate things.
If you distribute to a large number of cousins, nephews, nieces etc, the trust then owes this money to the beneficiaries. You could then enter into an arrangement for the beneficiary to gift back their distribution, but it can be a dangerous path to take. It depends on how well you know your relatives! The gift back to the trust would not incur tax.
In the case of a large profit made by a trust, I would distribute to myself and my wife, my kids, and my sister and her kids. I would then put the rest into a company, making sure the group pays no more than 30% tax.
Hi Dan,
You say I can enter an arrangement (not an agreement) to have the beneficiary gift back their distribution. In other words, this arrangement is not governed by law. Correct?
When the beneficiaries gift back to the trust, it will remain with the trust and not myself? If this is so, then I'd be going in circles wouldn't I? Or can I distribute to myself and my partner after this cycle without being affected by tax?
Does this apply to the 30% capped tax through a corporate trustee as well, since to receive income from the company I would need to be paid a salary?
So many questions, I hope I'm not becoming a pain here.
Thanks again.
Oh wait, I think I see where you're going.
You distribute enough income to your wife, kids and yourself to cover living/comfort expenses and then require all other beneficiaries to return their share as a gift to the trust. You then use the money placed back in the trust to invest further and much more efficiently since you haven't paid a large CG Tax.
The same would apply to the company. Which I believe (in your case) you distribute income to once the remaining beneficiaries have received a certain amount, thus keeping below 30% tax all up.
Sorry, I should have said agreement, rather than arrangement.
The company would not need to gift back it's income, as you control it anyway, so the company is not going to sue the trustee to get its money. The gift back from other beneficiaries would be to you, or you partner, or whoever you choose, not the trust.
You've got it. The company is used to cap income tax at 30%. To get money out of the company, it can pay a Fully Franked dividend (after it has paid some tax) to the shareholders.
Excellent, it seems like I've got all my questions covered. Thanks for taking the time to walk me through it!
You're an account right? I'll send you a PM if you can help me set up a trust in the near future. (I'm a Sydney resident by the way)
Could you please point me in the right direction?
You must be logged in to reply to this topic. If you don't have an account, you can register here.
