I've been reading a book by Dolf de Roos, and he mentions in the book that say your IP has increased in value, that he wouldnt sell it as there would be capital gains tax … But rather he would refinance it.
Can anyone explain what he means by that, and if possible to apply it to Sydney/NSW scenario?
Also, if he continues to refinance it and buy more and more properties, does he just rely purely on rental income or would he sell it eventually?
Thanks in advance.
Blai,
Refinancing is when you borrow against the current value of the home if it has gone up in value. Dolf chooses not to sell because he'll lose his positive cash flow property and a large chunk of capital gains in tax. If he refinances on the other hand, he keeps the property and is able to use the equity to invest further without being taxed for his gain – since this is borrowed money.
You need to be careful with this approach as it is more applicable in an up trending market. You also need to consider how much debt you can effectively manage before you go nuts refinancing every property that has gone up in value.
Keep in mind that you will only be able to refinance up to 80% of the properties current value.
Thanks.
So ultimately, one would still need to sell the property to realise the gains though right?
So when they sell it, in the end they would still need to pay CGT ? or is there some loop hole or way around?Any good places or books about property tax in NSW/Australia?
Thx in advance
Well in Dolf's case he refinances his properties to purchase depreciating assets (a.k.a liabilities) like his PPOR(only an asset once sold and if it makes a profit)/Cars/Other luxuries – This is how he 'realises' his gains. If you've read Steve's book '0 to 260+ Properties…" you'll find that this technique can become dangerous if you're not careful with managing your debt as I mentioned earlier.
You did raise a good question though about tax loop holes. You can limit the amount of capital gains tax you pay to 30% in the dollar if you purchase your investments through a discretionary trust or company.
You can learn more about Trusts through this post: https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4326640
This article is a great read too: http://www.propertyupdate.com.au/articles/149/1/Trusting-Trusts/Page1.html
If you have any questions regarding structuring your investments (i.e. using trusts) then there's plenty of help available here. Just ask away!
Cheers
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