A bloke at work has been explaining how he's planning to sell his currently CF+ property in order to buy a negatively geared one to "take advantage of the tax benefits."
For the lift of me, I don't see how this could be an advantage to him, but he's adament. Could someone please enlighten me as to whether this strategy actually makes sense ie – deliberately looking to lose money??
Interest paid on a loan for an investment property can be claimed as an expense which results in a tax deduction on your personal income if you are making a loss on the property (cash flow negative).
There are positives for both types of property but the thing with negativly geared property is that it must appreciate in capital value to make the investment worth while.
Note: I would say the same is true for CF+ properties also after some more reading
hmm if the first house is cf+ why wouldnt he just get another thats slightly neg cashflow to offset it and own 2 houses?, he is gonna lose a bit of money with capitals gains and fees to sell. Isnt this they way to grow your property portfolio?
I’m with Michael above, why wouldn’t your friend just expand their portfolio, use the surplus cash-flow from the first property to help with the repayments on the negatively geared property? Negative gearing has it’s place in an investment strategy, but it’s pointless to buy a property solely for tax deduction purposes.
Ideally you want your negatively geared property to become positive over time, or to realise good capital gains and sell for profit down the track.
Exactly – that's why I'm a bit confused about the whole thing! I think he's too focussed on the Tax Savings element to see the bigger picture.
Hi dodo_lurker
There's no clear benefit unless your friend is fairly confident that the negatively geared IP is going to experience enough capital growth in the future to offset the losses from negative gearing and also make up for the opportunity cost of selling his other IP.
It's nice to be able to claim the losses associated with an IP…..but you must make the "loss" first in order to claim it. Therefore, investing primarily to reduce your tax bill is flawed. The tax breaks associated with investing should be seen as a bonus and not the main reason for investing.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
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Dodo , just to add a little, what if the govt removed negative gearing offsets in the future (been done before). Like the others, I’d be expanding the portfolio & taking the equity out of the first property as the deposit. Maybe the idea that he can have higher borrowings with 2 IP’s might excite him?
there is a simple rule, if you are paying more tax you are probably earning more.
I dont know why anyone would try and sell something that everyone else is after
sam2011 wrote:there is a simple rule, if you are paying more tax you are probably earning more. I dont know why anyone would try and sell something that everyone else is afterTotally agree with Sam2011,
I wish I was paying 1 million in tax as I would also be making 1 million.
EngeloRumora | Ohio Cashflow
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Maybe i am in a lucky position that all of my properties are owned either unencumbered or the odd one with a loan is still positively geared but i have to say the only reason i would sell one of these is as Jamie mentioned would be to replace it with something i though would grow at a quick rate through capital growth rather than income.
Changes to legislation in regards to negative gearing could certainly have a bearing on cash flow however i think as the Labour Govt of the 80's experienced all landlords would do is increase across the board their rents to nulify such action.
Cashflow is certainly king in the current climate when fixed interest and Term deposit returns are so low however not at the expense of growth. To buy a property yielding 7% per annum is no good to you if the price is stagnant and inflation is running at 5% when you could buy something with a lesser yield and get 6% per annum in the way of capital growth.
Remember income is Taxed at your highest marginal rate (odd exception excluded) whilst Capital Gains can be Taxed at a concessionary rate starting at 10%.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Dodo,
Assume your mate is on the highest income bracket and let's play a game.
For every dollar he gives me I'll give him 50c back. Ask him long he'll keep that game up for if he isn't getting growth on the property.
Tell your mate he needs to balance his portfolio not turn it on his head for a negatively geared portfolio. As someone else has said keep the property he has and grab a negatively geared property if he wants to save some tax but don't throw the baby out with the bath water unless there are signifcant costs just around the corner, or the property is under 'threat' by zoning changes, open pit mine, railway line etc.
I guess the moral of the story is to not always listen to the bloke at work.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
That bloke at work is pretty crazy. I couldn't believe it when I saw the headline of this thread.
I'm actually proactively looking for CF+ properties and he's wanting to get rid of it…
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