Hey guys,
very new user of this site but enjoying reading the useful information…
My situation is that my wife and I built a new home 18 months ago… We sold it after 12 months and moved in with her family leaving us with 100K which includes our deposit and money made on property…
We are thinking we wanna build again but im unsure if we should… Some things crossing my mind is to purchase a renovated wood house for $250000, buy land ($130000) commence the building process, then move out after 6 months or so into our new house and rent out the older property…
My other thought is to just buy the land and build a new house but itll mean we have a mortgage of $250000…
What worries me with renting out a property is 1) I dont know enough about CGT 2) how much of my investment property income will be taxable.
Our incomes are average at 55K each per year.
Location is Toowoomba.
What worries me with renting out a property is 1) I dont know enough about CGT 2) how much of my investment property income will be taxable
Hi Bullet.
CGT is fairly simple. You aren't up for CGT until you sell and then, in that financial year, the profit you realise when you have sold your IP is taken by the ATO at 50% and then you pay tax at your marginal rate of tax for that financial year. In other words, you sell and make $100,000 profit. The ATO requires a CGT on 50% of this profit which is $50,000. You now must pay the applicable marginal rate of tax for that financial year on the $50,000 only. So, as an example, if you are on a marginal rate of 30c in the dollar then you are required to pay 30% of the $50,000 which equals $15,000 in CGT. Now, you may be despairing at this point but you are forgetting one of property investing fundamental joys – whilst you have an IP EVERY $ you spend in relation to the IP is deductible against your income tax. So, you can claim depreciation of the house and its fixtures & fittings, you can vary your income tax throughout the year (S15.15), and you can use your tenants rent money and your tax dollars to subsidise most or all of your out-of-pocket expenses.
Your tax burden should not be a reason to deter you from investing in property – it's the tax relief that should encourage you to invest into as much property as you can realistically afford!
I hope this has been of benefit to you.
Kind regards,
Hi bullet46,
Welcome to the forum! Congratulations on your property flip – $100K in 12 months must feel good.
Good question. What are your goals? Either strategy, you will most likely need a mortgage.
What I can suggest to you is to understand the numbers back to front. Calculate what your mortgage repayments will be, what your cashflow will be based on the rental yield of Toowoomba, look at the historical CG in Toowoomba to get a feel of how much equity you will create based on your strategy. Be aggressive in the analysis to leave yourself some room for error.
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Generally speaking, rental yield in Toowoomba is around 4.5%. You will most likely be negatively geared given that interest rates are much higher so you're more likely to get a tax relief like Anthony suggested rather than burden. I would sit down with your accountant if you're worried about this issue though.If the investment is negatively geared, you will need to inject more out of pocket cash to maintain the property investment. This also means that you will ultimately only really make good money from the capital gains when you eventually sell the property rather than the cashflow because you're renting it out. Historical capital gains has been quite low over the last couple of years in Toowoomba so you need to be comfortable with the future of the suburb (are there catalysts for capital gains? New infrastructure maybe?).
Therefore, it depends on your goals:
– If you want to finally settle down in a nice home and can afford the burden of mortgage repayments based on the numbers, then either the first or the second strategy could work.
– If you want to live off the cashflow of the property, either strategy is unlikely to be able to achieve this for you.
– If you want to do this for tax relief purposes, then either strategy could work since you'll probably be negatively geared on both (but it also means more financial pressure).
– But if you believe in the capital gains story of Toowoomba and want a place to live but also an investment property to sell, then the first strategy could work depending on the numbers
– Finally, if you want to property flip again and believe in the capital gains story of Toowoomba, then the second option would likely be more profitable if you eventually sell the property
Apologies, I know the above is a little vague but hopefully it gives you food for thought.
Good luck and let me know if have any questions.
Jase
Just adding a slightly different perspective – all of your time lines (stated and experienced) to date have been very short. Property is a longer term investment so I would counsel you to think longer, rather than shorter, timeframes of around 10yrs or so.
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