All Topics / General Property / Calculating +ve cash flow incorperating Tax

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  • Profile photo of wormitwormit
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    @wormit
    Join Date: 2004
    Post Count: 7

    Hi its the newbie asking more questions again. Since I’m having trouble finding a 10.4% return I was re reading the bible (0-130) to discover a loophole. I then found out that you can incorperate your tax rebate into the calculation. My husband is on the maximum tax bracket, so refunds were our first motivation for investing
    (-ve gearing). Now I’ve discovered that +ve is the way to go, and now I have found out that we can include tax rebates into it. Aaaagh!! How does it work – is there a simple calculation, or will it mean a nightmarish maths duel with every considered property I find?
    Please help!!
    Thanks guys – I am now an internet junkie thanks to this site!!

    AJ Carter-O’Sullivan

    Profile photo of FFCommFFComm
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    @ffcomm
    Join Date: 2004
    Post Count: 627

    It shouldn’t be a nightmare, as there are a number of options. First you could put the propertis in a legal entity (trusts for example), where you can distribute money how you want (so you would give cash/rental income to the person on the lowest tax bracket).

    Or you could buy the properties in your name, and only you would get taxed on rental income.

    Or make a joint venture document where you decide how muh of a return each person gets (though it can be very hard to change).

    So there are a few options. You should also have a good accountant as part of your investing team. So they should be able to help you further – If you don’t have one, nows the time to start looking.

    Rgds.
    Lucifer_au

    Profile photo of Tasman PropertyTasman Property
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    @tasman-property
    Join Date: 2003
    Post Count: 126

    For your cashflow calculations, the difference tax makes is simply another line to add in (to the examples Steve gives in 0-130 which you’ve already seen).

    For example, in the book all the deals are worked out without depreciation considered (there are reasons for this but i wont go into it as you wanted to know how to incorporate a tax rebate into your cashflow calcs)

    Now depreciation is an ‘on paper’ deduction meaning you can claim a certain amount as a tax writeoff for the decrease in value of the property (building and chattels). These amounts are known as special building writeoff (typically 2.5% of the value of the building each year) and chattel depreciation (which might be say 15% of the value of the chattels especially fixtures and fittings like carpets, drapes, fixed heaters etc…)

    Lets say you can claim an on paper deduction of $4,000. If your husband is on the top marginal rate then he will save about $2,000 in tax as a result. Effectively this is extra cashflow that you can add back into your cashflow calculations, making the deal seem higher CoCR.

    This is a legitimate way to look at cashflow, since you ARE better off by the tax saving whilst you are working. However Steve doesnt include it in his book (in most places) as he considers it a separate cashflow to the property deal itself, and one that is not available if you dont have other income to offset the depreciation deduction against (such as when all your properties allow you to retire!). He argues that a property should be +CF enough without the deductions.

    Hope this helps.

    John [biggrin]

    (I believe that later this year there will be no +CF deals left in NZ, so I’ve moved here to invest full time. I can find +CF deals for your NZ portfolio for a fee, just email me.)

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    Hi Wormit,

    Ian Somers has such a program that calculates your cashflow situation after tax deductions called PIA. It is available for ~$250 and includes some approximations for depreciation allowances too.

    It is downloadable at http://www.somersoft.com and there is a trial version (albeit fixed numbers) for you to play with to see what it can do.

    Derek
    [email protected]

    Read my comments? Think I can help you? PM or email me.

    Profile photo of RussHRussH
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    @russh
    Join Date: 2004
    Post Count: 342

    Wormit.
    You dont need to play with figures to get a 10.4% return.Do a bit of homework and youll find the properties.Some even have better returns than 10.4%.
    Russ.

    So many +CF properties in Western Australia.Let me help you. And we can achieve a win win situation.Russ.0438 659 411

    Profile photo of ez-rentez-rent
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    @ez-rent
    Join Date: 2003
    Post Count: 139

    There are two freebies for this. ez-rent (www.ez-rent.com) and a recently written one posted a month back that I can’t remember off the top of my head right now. Check the “Heads Up” forum for more details..

    [email protected]

    Originally posted by Derek:

    Hi Wormit,

    Ian Somers has such a program that calculates your cashflow situation after tax deductions called PIA. It is available for ~$250 and includes some approximations for depreciation allowances too.

    It is downloadable at http://www.somersoft.com and their is a trial version (albeit fixed numbers) for you to play with to see what it can do.

    Derek
    [email protected]

    Read my comments? Think I can help you? PM or email me.

    EZ-Rent. The free tax and cashflow simulator for Australian property investors.
    http://www.ez-rent.com

    Profile photo of DerekDerek
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    @derek
    Join Date: 2004
    Post Count: 3,544

    HI Ez,

    I couldn’t remember whether or not your program included tax deductions in is hence the reason for not posting your details here.

    Derek
    [email protected]

    Read my comments? Think I can help you? PM or email me.

    Profile photo of JuliaJulia
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    @julia
    Join Date: 2004
    Post Count: 217

    wormit,
    If the high income earner’s employer allows salary sacrifice have a look at the rental property kit at http://www.bantacs.com.au for a further boost to cash flow.

    Julia

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