Forums / Property Investing / Help Needed! / Negative or positive for high income

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  • Profile photo of boshieboshie
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    @boshie
    Join Date: 2006
    Post Count: 52

    Hi again,

    We are renting out our PPoR and living with parents for a while to save money.

    My question is:

    If hubby is earning $130+k pa (me nothing !!  home with kids !!)  is it better for us to negative gear our rental or positive??  

    Sorry if this seems like a ridiculous question, but I was reading (somewhere) that it is more beneficial from a taxation perspective to negative gear the property if earning a high income.

    Thankyou,

    Boshie

    Profile photo of Scott No MatesScott No Mates
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    @scott-no-mates
    Join Date: 2005
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    It depends on your circumstances – if the house is in your name, then you would be on the lowest tax bracket and may not need to pay tax on the income if the net income is below your tax-free threshold . If it is in your husband's name only, then the loss (if negatively geared) would serve to reduce his income and he would pay slightly less tax. If it is jointly owned then it would be a mix of answers.

    Profile photo of Jamie MooreJamie Moore
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    @jamie-m
    Join Date: 2010
    Post Count: 5,065

    Hi Booshie

    Like Scott said – generally speaking, it's best to have negatively geared properties in the higher income earners name and positively geared in the lower income earners name.

    However, remember that properties tend to steer towards CF+ territory over time as rents continue to increase.

    Another thing to note is that taxation benefits shouldn't be the main motivator behind a property purchase (that's not to say that this your main motivator). Rather, you should look for a property that fits in with your longer term strategy and view the taxation benefits as an added bonus.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    Hi Boshie, the reason people purchase property that is initially negatively geared is if there is potential for capital gain where in time the gain will outweigh the initial income losses.

    Yes, you are correct in that a negatively geared property can offset against high incomes come tax time, however in your case since you already own the property and are renting it out, if there is the chance to positively gear it for that particular property, then that's what you should do.

    What's more beneficial? Losing money through negative gearing and getting only a potion of it back at tax time, or making a profit through positive gearing and paying some tax?

    You can then use the profit to save for another PPOR purchase down the track.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of KevinGrunertKevinGrunert
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    @kevingrunert
    Join Date: 2011
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    PLC wrote:
    What's more beneficial? Losing money through negative gearing and getting only a potion of it back at tax time, or making a profit through positive gearing and paying some tax?

    As Tom pointed out, you will only get a portion of your loses from negatively gearing back as tax credits/refund, based on your current marginal tax rate. For your husband's income bracket ($80k-$180k), this is 38.5c per $1. 

    In other words, for every $1 that you lose on the property's rental income compared to its costs, you will only get 38.5c back, leaving you to find the remaining 61.5c from your household budget. 

    I've explained it in more detail in an article on my blog, which you can read here: http://kevingrunert.com/my-thoughts-on-negatively-geared-investment-properties

    Kevin.

    mkbonline
    Participant
    @mkbonline
    Join Date: 2012
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    Stupid question from a newbie in Property Investing.

    When we say positive cash flow property, do we use Interest Only repayments or Principal+Interest repayment for Net Cash flow Calculation.

    I am finding it really difficult  to find a positive cash flow property even in Western suburbs of Sydney,  if I use Principal+Interest loan repayment for Net Cash flow calculation.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Of course there are also Non Cash Deductions such as Capital Allowances / Depreciation which can be claimed and therefore this will help balance the shortfall on the household budget.

    These are claimed in the same proportion as the ownership of the Title i.e Sole Ownership / Joint Tenants / Tenants in Common etc etc.

    Have to bear in mind that any Capital Allowance claimed during the period of ownership is deducted from the Cost Base if the property is old in the future.

    In regards to your PPOR Boshie what i would do will depend on what are your long term intentions for the property. .

    Once we are aware of this there are a couple of strategies you could look at adopting.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    Interest Only

    Jacqui Middleton | Middleton Buyers Advocates
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of PrimePropertyInvestorPrimePropertyInvestor
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    @primepropertyinvestor
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    Hi there, 

    I agree – Jamie has gave you very good advice, I would follow it.

    All the best!

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
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    MK agree with Jac (as always) but if rates fall much lower you should be able to get + cash flow with P & I.

    All a matter of education and associating yourself with the right type of person to source the properties.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of boshieboshie
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    @boshie
    Join Date: 2006
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    Hi Richard,

    thanks for your advice. 

    Our long term intentions are a bit sketchy.

    Our current situation is that we will (hopefully) be moving to WA to live in a BHP subsidised house as hubby has landed a good job in the mines.  We only pay $100 week rent, no water bill, no electricity bill.  Basically only our phone bill to pay.  We will rent out our house in Sydney while we're away.  We plan to be gone for 5 years, then return to Sydney and buy our dream home in our favourite area on the beach.  Whether we need to sell our current home or keep it will depend on how much money we can save while we're away, I guess.

    We're in the process of refinancing our 2 loans and credit card into the one loan.  Which I assume we should keep as Interest Only??  The Westpac advisor advised us to incorporate our debts into the one loan with an offset account and keep it at Interest Only while we're away.  She also advised us that any spare cash at the end of each month should go straight onto the loan as we have redraw facility if we want to go on holidays or whatever we may need cash for.  Would you agree with this advice??

    We are desperately trying to get ahead and build a portfolio.  We started later in life as we are both in our mid 40's (if only I'd known then what I know now and got the ball rolling in our 20's !!!).  I'm thinking we should pay as much as we can onto our loan, until we've built up enough equity to purchase our next investment.  What are your thoughts on this.

    We are open to any advice you can throw our way.

    thanks again

    boshie

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    Boshie, your Westpac advisor has given you the wrong advice (not surprisingly).

    First off refinancing your loans and credit card into the one loan means you will will a mixed purpose loan. You will need to segregate your loans into deductible (PPOR loan which will become an investment) and non deductible (credit card, etc). The deductible loan becomes IO, the non deductible as P&I with offset account linked to this non deductible loan as well. Any excess funds to be put into the offset account.

    This will allow you to maximise your deductible debt while paying off your non deductible debt quicker, and allowing you to save money for your future PPOR.

    On another note, if you are only gone 5 years as you suggest and sell your house when you get back to buy another one then you are eligible for CGT exemption.

    Cheers

    Tom

     

    PLC | Phoenix Loan Consulting
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    Profile photo of boshieboshie
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    @boshie
    Join Date: 2006
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    Hi Tom,

    Thankyou for your reply.  Just wanted to clarify what you think I need to do.

    I have 2 investment loans and one credit card debt of $22.5k.  The bank Advisor suggested I incorporate all 3 debts into the one loan which would be IO with offset account, and therefore much more manageable for us.

    Are you suggesting I should only refinance the 2 investment loans into one, keep it IO with offset account.  Then I dont understand what to do with the credit card debt to make it more manageable for us.  We got into so much debt because my hubbie had unexpected brain surgery mid 2012 which (needless to say) was quite expensive – not to mention time off work as he is a self employed builder!  So we are now trying to get ourselves back on track, but in the meantime have managed to accumulate quite a large (and unmanageable credit card debt).

    We are moving back to Melb to live with parents for a while until we get sorted out again financially.  So we plan on renting out our PPoR in Sydney.

    We dont have any spare cash at the moment and need to fund our move to Melb, so I really need to clear off credit card debt and start afresh.  Hubby now has a fabulous job which will enable us to pay off our credit card every month, but until then we need to fund our move to Melb.

    Not sure what to do!!!

    Thanks for any advice :-)

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    Hi Boshie,

    Just to clarify with the investment loans, are they for 2 different IP's, or something else?

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of boshieboshie
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    @boshie
    Join Date: 2006
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    Hi Tom,

    They are both on our one PPoR, but were set up as investment loans.  The first was our original mortgage, then the 2nd was to finish the renovations.  So yes, they are both for the one property which is currently our PPoR – soon to be our rental property.

    Thankyou,

    Profile photo of JhaiMitchellJhaiMitchell
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    @jhaimitchell
    Join Date: 2012
    Post Count: 30
    mkbonline wrote:

    I am finding it really difficult  to find a positive cash flow property even in Western suburbs of Sydney.

    I can't see how you are finding it hard to find positive cash flow property?

    I admit it is hard to find one with a 10% yield already built into it.

    I find with Western suburbs of Sydney (Toongabbie/Blacktown) you need to find the value I.E. a half finished granny flat or one needing updated.

    A quick renovation a boom instant cash flow!

    Profile photo of JhaiMitchellJhaiMitchell
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    @jhaimitchell
    Join Date: 2012
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    Hi Boshie, 

    This may help.

    PLC wrote:

    This will allow you to maximise your deductible debt while paying off your non deductible debt quicker, and allowing you to save money for your future PPOR.

    On another note, if you are only gone 5 years as you suggest and sell your house when you get back to buy another one then you are eligible for CGT exemption.

     

    Cap­ital Gains Tax & Main Res­id­ence Exemption Article.

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
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    In that case if you are looking to improve cashflow by consolidating the credit card debt with the other two loans, it would be something like this (assuming LVR is acceptable) .

    Security: PPOR

    Loan 1 – Consolidation of original mortgage and renovation loans (as long as the reno loan wasn't used for any personal related expenses). Setup as Interest Only

    Loan 2 – Loan to pay off credit card (22.5K). Setup as P&I. Also setup offset account and link to this loan and any savings along the line can be placed in here.

    Your credit card is bad debt that needs to be chipped away first. The purpose of the above setup is to help you do this while maximising your deductible debt.

    Just need to be aware that when you refinance, your lender will reassess your financial situation. From your previous posts, it seems that your husband hasn't started his new job yet as you are in the process of moving to Melbourne first? That will be an issue with serviceability.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Melbourne based Mortgage Broker | Making Finance Simple

    Profile photo of TheFinanceShopTheFinanceShop
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    Hi Boshie,

    You are asking or in need of specific advice. It wouldn't harm or probably cost you to contact Tom and run through the finer details.

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Hi Robyn

    Sorry to come in late again in the train of posts but being in the UK still means we are a little behind in time.

    I have to say to you do not under any circumstances proceed with the Westpac refinance on the terms set out as clearly the advice you have been given is extremely inaccurate and could prove expensive in the long term.

    In addition i am at a loss why your so called adviser is suggesting this.

    He / she clearly has no idea about loan structure or preserving your tax deductibility let alone ways of maximising your deductible debt.

    A spousal buyout is a option worth considering but would need to know the numbers first.

    Sorry but if you proceed with Westpac i think you will regret it both in the short and long run.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

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