All Topics / Help Needed! / Should we sell our neg.geared IP? Will we pay CGT?

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  • Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Evening all,

    I love this forum…great to be able to bounce ideas off like-minded people!!

    My partner and are now learning about pos.geared property investing and are confident that pos.geared investing is the way for us to go (as a result of reading Steve McKinghts book and hearing him speak a few times now-so were just new to it). We'd just like some advice as to whether or not our following train of thought is sound or whether there is something we may have not considered…..

    Sell our neg.geared IP?
    That is to say we currently own a neg.geared property (duplex in Corlette NSW) that we initially purchased in Oct 2008 and lived in until Jan this year. We believe we need to now sell this property as we have no interest in losing money (mortage minus rent = money out of our pocket) in order to make tax savings. We have moved to Canberra for work and have rented the property since Jan this year. The reason we want to sell it is that we will be able to free up the equity we have built into it (approx $49k based on a pessimistic sales price) and be able to use that to begin investing in lump-sum cash investments (renovations). Given our objective to commit to and focus on pos.geard/pos.cashflow investing is there any conceivable reason we should not sell it?

    Will we pay CGT?
    Further, I jumped on the ATO website and ran through a quick calculator/questionnaire to work out whether we would have to pay CGT on it if we sold. It said that CGT would be "completely ignored" i.e. we wouldn't have to pay any. (I even included the fact we vacated it Jan this year). Does this seem right? My father in law described a different situation whereby we'd pay CGT on a "portion" of the capital gain given it has been used as a rental property from Jan til now. Any ideas?

    Recommended accountants in Canberra?
    We do plan to get specific advice from a tax accountant (about the CGT part) so if anyone can reccommend a property savvy account in Canberra we'd greatly appreciate it.

    If you got this far thank you very much. We really do appreciate any responses/feedback.

    Kind Regards,

    Jye Thomson

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi there

    With your current property, has it experienced any growth? Are there any drivers within the area that may enable the property to grow in value?

    I understand that no one wants to lose money, but properties that are negatively geared don't need to be the end of the world providing their achieving enough capital growth to offset the loss. I've got a combination of CF- and CF+ and would never consider selling a property purely based on it's cashflow position – there is much more to consider.

    I'm not an accountant but I would have thought that CGT would be payable for the duration that it was an IP – so I guess I'm with your father in law on that one.

    A good accountant in Canberra? I use Kelli Lawton from Cosgrave Soutters in Civic – her details should come up in a google search.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Giggleguts22Giggleguts22
    Member
    @giggleguts22
    Join Date: 2010
    Post Count: 11

    My understanding is that if this was your PPOR prior to you renting it out, and you havent bought another PPOR then you wouldnt pay any CGT (for a  7 year period I think).  If you bought another PPOR then this would be considered an IP and you would pay CGT on the increase.  If you do the latter and you borrowed money then you would have either self valued or got a valuation on your property by the bank so you would only pay CGT on the portion of difference of the value of the property when you moved out to when you sell.  I think its always a good idea to get a valuation when moving property so you arent wondering what it was valued at when you moved out and trying to justify your portion.

    If it was bought as a IP then any increase is subject to CGT…. and as you have kept it for more than a year then you only pay CGT on half of what you make.  So if you make 50k after all expenses for buying the property then you only pay tax on 25k – and divided between you equally if that is how it was set up… so add 12.5k to each of your taxable income.

    THis is my understanding, but I am sure if I have anything wrong with this someone else will clarify for you.

    Bec

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    I don't think selling a property so as to buy 'positive cashlow' property is a good idea.

    Think about which will give the greatest return. If this one is a dud then it may be best to sell but do the sums first.

    It could be that your property will be exempt from CGT because it could be still classed as your main residence. But it could also end up as a loss if it is a dud property. In that case it would be better not to claim the exemption

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of tvc889tvc889
    Member
    @tvc889
    Join Date: 2012
    Post Count: 3

    You will not need to pay CGT – I am 100% sure on this.

    Renovation for profit sounds good but you will need lots of time and effort.

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    I agree with TVC. Renovation for profit requires time and effort, and is extremely risky if you dont have the necessary skills.

    Also agree with Terry. I think that selling a property because it is negatively greared just to buy a positively geared property is a terrible idea. Big deal, you might get $2500 per year cashflow from a positively geared property, but what happens when interest rates rise? Are you just going to blindly sell that property because it is now negatively geared? And what if your current property is in a growth area and you expect capital gain? You are saying that you will sell a property that is expecting capital growth to by a property that might get you a couple of thousand dollars a year cashflow?

    I think residential property investing is predominantly a growth asset, and cashflow is a bonus that comes later. If you are interested in cashflow, then you should buy commercial property or invest in another asset class (in my opinion), Sure some people get amazing cashflow from residential property (like Steve McKnight or Nathan Birch) but they do things differently- they dont just buy a house and sit on it.

    I have heard Steve say that residential property is great for slow and steady growth but terrible for cashflow, and you should get into comercial property if you want cashflow. So even though he indicates in his books that you can get really good cashflow from buy and hold residential property, he doesnt really promote this when he talks. And you should also realise he didnt make his money from buy and hold residential property- he used vendor finance to build a cashflow business.

    Cheers,
    Luke

    Profile photo of peiranyupeiranyu
    Member
    @peiranyu
    Join Date: 2012
    Post Count: 15

    capital growth sometimes (can i say most of the time?) can be much more than your rental incomes. You really should have some consideration before you make the decision  just based on you want CF+.

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    Evening all,

    Firstly, apologies its been so long since I've replied. Secondly, thankyou all for your input and advice-very much appreciated.
     
    Just to clarify a few points I guess from our side of the fence – and as some of you point out – we fully understand that neg.geared property doesn't have to mean the end of the world-provided the figures stack up and it makes sense (financially) to keep it (i.e. CG outweighs losses, other opportunities for tax savings through depreciation claims etc) . The main drive in our thinking in regards to selling our property is that overall (when we consider all factors-CG to date or lackthereof, potential for CG in future, nett.loss, ability to continue funding nett.loss,etc) we believe we can achieve a greater return elsewhere than having our $ invested in this property. Does that seem reasonable if I explain it that way?  That's not to say we will flipantly chop and change between buying and selling property simply because it does not make pos. cashflow-but instead weigh up all the pro's and con's and decide from there. With our property specifically – which I probably should have pointed out initially – it is not in a growth area. In fact we expect to sell it for essentially the same price we paid for it in Nov2008. Therefore the "equity" that we will realise is that which we have built into it purely through our own mortgage repayments – I didn't say that we would sell a property that was expecting capital growth (luke86). If our property was achieving significant enough CG to cover our nett. losses (and some) then I imagine our thinking would be different.

    luke86-I also agree with you that residential property is not the greatest vehicle for achieving +cashflow. Hence why we are keen to initially do lump-sum cash projects (renovations) and then purchase debt-free commercial property for +CF (as Steve advocates.) That's the plan.

    JamieM-thanks for Kelli's contact. Have been in touch with her-she was very helpful. Will be using her for our tax returns and tax advice from here on – I did mention your name so maybe now she owes you a coffee? I'll leave that with you. 

    For all-I can confirm (through my discussions with my accountant) that in a situation we described above – where you move out of your PPOR and the rent another home you will not pay CGT if you sell it for a 6 year period after vacting it. The ATO still considers it to be your PPOR for that 6 years provided you do not purchase another home to live in . The story changes if you do that.

    Cheers

    JT 

     

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190
    JT83 wrote:
    Evening all,

     
    For all-I can confirm (through my discussions with my accountant) that in a situation we described above – where you move out of your PPOR and the rent another home you will not pay CGT if you sell it for a 6 year period after vacting it. The ATO still considers it to be your PPOR for that 6 years provided you do not purchase another home to live in . The story changes if you do that.

    Cheers

    JT 

     

    Not in all situations.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi JT

    Luke mentioned above that Steve 'used vendor finance to build a cash flow business.'  Instead of selling your Corlette property at a loss (if you sell it for what you bought it for in 2008, it will be a loss), another alternative may be to sell the property with vendor finance (VF).  This has the potential to convert your Corlette property to positive cash flow and, at the same time, fix (lock in) your capital gain.

    If you wish to free up your equity in the property first, i.e. before you convert it to positive cash flow by on-selling it with VF, it may be possible to redraw from your loan.

    We have just sold a property close by (in Salamander) with VF.  It was sold at a premium price and is now generating about $500 per month positive cash flow.  Considering your Corlette property is probably extracting some serious dollars from your pocket each month, a turn around to making a few hundred dollars per month from the place (after all expenses), may be worth considering.

    Cheers,  Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
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    An alternative way to finance your home.

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37
    PaulDobson wrote:
    Hi JT

    Luke mentioned above that Steve 'used vendor finance to build a cash flow business.'  Instead of selling your Corlette property at a loss (if you sell it for what you bought it for in 2008, it will be a loss), another alternative may be to sell the property with vendor finance (VF).  This has the potential to convert your Corlette property to positive cash flow and, at the same time, fix (lock in) your capital gain.

    If you wish to free up your equity in the property first, i.e. before you convert it to positive cash flow by on-selling it with VF, it may be possible to redraw from your loan.

    We have just sold a property close by (in Salamander) with VF.  It was sold at a premium price and is now generating about $500 per month positive cash flow.  Considering your Corlette property is probably extracting some serious dollars from your pocket each month, a turn around to making a few hundred dollars per month from the place (after all expenses), may be worth considering.

    Cheers,  Paul

    Hi Paul,
    Thanks for the advice. I understand the concept of VF, but doubt we would be able to successfully negotiate a +CF arrangement and sale. I say this given the stagnant state of the market and recent sales for duplexes in the area not being at a “premium” which I imagine we would need to sell at with VF. I’d be keen to hear if you think otherwise. Additionally, we are trying to get away from owning property in our own name.

    Thanks again for your post!

    Cheers
    Jye and Tahnee
    (previously JT83)

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37
    Terryw wrote:
    JT83 wrote:
    Evening all,

     
    For all-I can confirm (through my discussions with my accountant) that in a situation we described above – where you move out of your PPOR and the rent another home you will not pay CGT if you sell it for a 6 year period after vacting it. The ATO still considers it to be your PPOR for that 6 years provided you do not purchase another home to live in . The story changes if you do that.

    Cheers

    JT 

     

    Not in all situations.

    Thanks Terry,
    Obviously people need to get tax advice tailored to their own circumstances.

    Enjoy your posts BTW.

    Cheers,
    Jye and Tahnee
    (previously JT83)

    Profile photo of lbluedentolbluedento
    Participant
    @lbluedento
    Join Date: 2009
    Post Count: 98

    Thanks for posting this JT and everyone for their great discussion points.

    We have a similar thought process going through our heads at the moment. We are trying to decide whether to sell a property that we bought as our PPOR in 2007 but we moved out of 2 years ago when we moved interstate. As with yours the market is stagnant (regional area) we have been advised that it will sell for about $10k more than we purchased it for. It is negatively geared but only slightly. We too wish to extract the $50k equity we have in it and use it to buy an investment property that is a better investment than this one.

    But like you we think
    a) do we wait until the market improves
    b) will prices improve in this town
    c) we have a great tenant in place who pretty much takes care of it as if it is his own, so in that respect all is good
    d) should we try and do a vendor finance
    Etc etc

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    You probably need to assess how it is and will be expected to perform. If you can get a better return elsewhere then it may be worth selling.

    Also factor in the non deductible interest you could save by paying down personal debt with the money released.
    And if it has only grown $10k then you might have a capital loss which could be used to offset future capital gains.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of J&TJ&T
    Participant
    @jye-and-tahnee
    Join Date: 2011
    Post Count: 37

    No worries lbluedento,

    For us we've assessed our situation and are confident we'll be able to have our money work harder and smarter elsewhere; hence having our place on the market right now.  We're not content to hope for the capital gains that are unlikely to come in our area (esp. for our dwelling type – every second dwelling in our suburb is a duplex!) and we're definitely over the fortnightly expense of owning the property. We believe with our current routine investment savings + the extra $ we'll be able to save without that mortgage + the realised equity after sale we'll be well on our way to having our first deposit and maybe part of the purchase, closing and reno costs (eek!) for our first reno. A smarter strategy for us at this stage.

    Good luck with your D (decision), would be keen to hear what you decided if you cared to share. 

    Cheers, 

    Jye and Tahnee 
    (previously JT83) 

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