Forums / Property Investing / Help Needed! / Investment property with CGT over 10 years…confused.

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  • Profile photo of dublin_101dublin_101
    Participant
    @dublin_101
    Join Date: 2008
    Post Count: 11

    hi..

    i've been saving cash a bit lately with the intention of buying my first home. at the moment i'm also thinking about perhaps buying a 2 bedroom unit as an investment property, probably in a second tier city, eg Ballarat,Bendigo,etc.

    i've found a negative gearing tax calculator which i've used to calculate the potential tax differences it would make for me on my current salary.

    this is the calculation i've used and with it.

    purchase price of IP:  200K

    Loan & Other Expenses Weekly Repayment $419.00
    Rental Income 44.15 %
    $185.00
    Taxation Benefit 27.68 %
    $116.00
    Owner Contribution 28.16 %
    $118.00

    From the above calculation, I understand it that from my pocket I'll be paying $118 per week,whilst there will be $116 per week which will come from tax return.

    So over 10 years, I'm looking at it like this:

    purchase price: 200K
    $118 per week over 10 years = approx $61K

    if the property ends up being worth 300K after 10 years…then I will have to pay approx 25% CGT on that.

    in that case, would it be a capital gain of $100K?

    If that is so,then I'd be paying approx 25K tax at that time, leaving me with a gross profit of 75K.

    Seeing that by that stage, I would have already paid a minimum of 61K, I'm thinking what is the point. Not to mention the extra costs of renovations, repairs,etc.

    Or should I just jump in with the mentality of "all propery doubles in 10 years" and hope for the best.

    advice appreciated. thanks.

    Profile photo of ducksterduckster
    Participant
    @duckster
    Join Date: 2004
    Post Count: 1,674

    Your loan repayment expenses you can claim only the interest payment.
    You haven't mentioned depreciation claim for the renovations. Get a quantity surveyor to survey the property to work out what you can claim as depreciation. Repair done during the income earning phase can also be claimed unless it is an improvement and then depreciation is used.
    if property is owned jointly by two people then the 100k gain is 50k each . If the 50% rule still exists in 10 years time then $25k
    Now depends on your marginal tax rate if it was 30% each then 25k * .30 =7500
    if owned by one person 100k  gain is 50k if the 50% rule still exists in 10 years time then $50k
    Now it really depends on your marginal tax rate in ten years time say if it was 30% each then 50k * .30 =$ 15,000

    I agree with you that negative gearing is a bit of a dud but imagine you pay more than the interest payment over ten years.
    lets say you pay $428 per week on a twenty year loan  at 9.47% p/a interest rate you end up after 10 years with a loan of
    $150,000 .
    Now imagine you pay 520 per week on a twenty year loan  at 9.47% p/a interest rate you end up after 10 years with a loan of
    $66,000
    Now over ten years do you think the rent is going to remain the same ?
    $184 * 52 = $9500 a year minus say $2000 for repairs and costs
    leaves 7500 a year. Now based on a 10% p/a interest rate once your loan gets down to 75,000 you are no longer supporting the loan the rental income is paying down the interest cost. remember this is if the rent remains the same and doesn't rise.

    This is what I have been doing for the last 15 years and in two months I will have my first investment house paid off completely.

    Based on 80% LVR I could borrow $800,000 for my next investment property and the rental income from the first property will help pay for the second property.  

    A negative gearing strategy works well if you can borrow and experience a boom property growth like in 2000 – 2003 where properties grew between 10% to 20% p/a depending on what area you purchased in.
    I have experienced years where the growth was stagnant but with the boom growth my property has grown by 7% p/a averaged over 15 years.
    I did purchase another property in Cranbourne , Vic in 2000 for $100,000 and sold it in 2005 for $170,000 that was a 70% increase in 5 years but that was during the boom period. That property is now worth $220,000 to 240,000 that's in 3 years another $50,000 I missed out on because I sold but I knew due to my circumstances and forecasting that I could not afford the $400 a month shortfall , about $15,000 in 3 years due to not having a job.
     
    Country properties will experience less capital growth than city properties but the entry costs are less.

    I recommend you buy Australian Property investor Magazine.

    Property investing is more about building wealth over time rather than selling a property in 10 years time and losing any more capital growth..

    it is hard to buy a positive geared property in this market but you can eventually make a property into a positive geared property by paying the loan off.

    Profile photo of give90give90
    Member
    @give90
    Join Date: 2007
    Post Count: 54

    doesn't the money that you input from your pocket get carried over as a loss against the profit?

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
    Post Count: 1,153
    dublin_101 wrote:
    Or should I just jump in with the mentality of "all propery doubles in 10 years" and hope for the best.

    No. You should approach this in a balanced and measured fashion, much as you've already started to do here.

    give90 wrote:
    doesn't the money that you input from your pocket get carried over as a loss against the profit?

    No.

    Cheers, F. [cowboy2]

    Profile photo of elkamelkam
    Member
    @elkam
    Join Date: 2006
    Post Count: 722

    Hello dublin_101

    In your calculations I think you may have forgotten to use the 50% discount to CGT because you've held the property for longer than 12 months. 

    Cheers
    Elka

          

    Profile photo of ducksterduckster
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    @duckster
    Join Date: 2004
    Post Count: 1,674
    give90 wrote:
    doesn't the money that you input from your pocket get carried over as a loss against the profit?

    No! , If you claim the expenses each year against your rental income or wage income you have got your tax deduction already !

    If you then try and claim the expenses as a CGT loss or to increase the cost base and against income each year , this is referred to as double dipping on deductions and isn't claimable by the ATO as you can only claim deduction once.

    Profile photo of dublin_101dublin_101
    Participant
    @dublin_101
    Join Date: 2008
    Post Count: 11
    elkam wrote:
    Hello dublin_101

    In your calculations I think you may have forgotten to use the 50% discount to CGT because you've held the property for longer than 12 months. 

    Cheers
    Elka

          

    the way i calculated was:

    purchase price: 200K
    sale price after 10 years: 300K

    that is 100K profit and I calculated the CGT at 25%. Therefore on the gross profit on 100K, i'd be paying 25K………….leaving me with a gross return of 75K.

    my input would have been 61K over the 10 years as per the calculation used on what I have to pay per week out of my own pocket.

    Therefore with a gross profit of 75K against an investment of 61K………….I was thinking what is the point of the investment???

    thanks

    Profile photo of dublin_101dublin_101
    Participant
    @dublin_101
    Join Date: 2008
    Post Count: 11

    back on the subject of negative gearing…in my mind a little over-rated.

    i just discussed the idea with a few ppl doing it and the consensus was basically that you had to pretty much rort the system and 'increase' your expenses on the investment property in order to maximise your tax return. 

    i wouldn't feel comfortable doing this. i'll keep looking and learning.

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