Capital gains and your end game

Guys. I'm not a tax expert. So wondering what is best to do when you have a portfolio of properties built up over 20-30 years. You are sitting on a bunch of properties all with massive gains and most cashflow positive. Short of just buying more and more, how to ultimately realise the value give the damn cgt we have in oz assuming you want to "take profit"?

Is it best to hold and rent and endgame is the income?

Or best to develop/extend?

Or to sell and offset any accumulated deductions across the portfolio?

Or keep buying? (But if so, again what's the exit plan/end game)?

Prob been answered before but I would appreciate the single best answer from an economic perspective.

 

Income (rent, dividends, interest) is what you live off without destroying your capital base. You need to generate as much income from your capital as possible given your risk profile.

For some that is living off rents, some refinance into shares or sell down some properties to reduce debt. There are many ways to go about it depending on how you feel about each strategy, there is no "best way".

 

All of the above and some. different for every individual.

 

Bahamas by datto posted 13th Mar, 2016 at 4:53 PM

 

Lol. Good point! Has anyone ever done that?

I presume many foreign investors do this all the time?

 

I knew someone might reply like this. But there must be an optimum thing to do.

Or is it to keep then property and simply suck out equity but never sell?

There must be a mathematical "best strategy" guys. Please advise.

 

What's the currency on datto island? Beer, rum, tequila?

 

Depending on your age Max, there will come a time where it may be difficult to keep topping up offsets via equity cash-out.

A conservative approach would be to harvest the right properties at the right time to leave you with more cashflow stock to support lifestyle and either no debt or very little debt reflecting skinny LVR's.

I'd prefer to live off rent than live off equity. That way you aren't at the mercy of the banks when they inform you that you are too old to be relying on rents for further borrowings as you don't fit their little box.

There is bloke on this forum that has done well though via a living off equity strategy.

If you have the right stock to develop and can see a favourable return on development costs then go for it I say, as long as you have enough "job" or "business" income to feed any problems and contingencies of the market turns and you have to keep them for a few years.

If you are holding stock on the coast especially in your favourite areas such as the Broadbeach to Burleigh to Currumbin strip, then I'd say the ideal time to harvest here would be two to three years time.

Still a lot of what if's as it depends on age, appetite for risk and where the bulk of your holdings are (and the point in the cycle they're at).

Not terribly formulaic or mathematical I'm afraid. Maybe work backwards to what income you require for your chosen lifestyle and see which of your properties would provide that if they were paid off and of course CGT liabilities are covered as well.
Best to have a buffer in case of vacancies if you have commercial stock so a little bit of debt is good......but not too much. Maybe Goldilocks level of debt is best (for me that would be an LVR of 10-15 %).

 

I say it's different for each person as everyone has different needs.
What's your endgame? Will you continue to work or never retire?
Do you need cashflow on a monthly basis through rentals or one lump sum by selling?
Do you need heaps of cash sitting in your account for emergency situations?
Say you have 3 houses worth about a million dollars each, with 1 million of debt still owing.
You generate about 3% return, 30k, minus expenses, should give you around 22k per house, in rent after expenses.
So roughly 66k per year.


If you sold up all 3 houses, paid off your debt, you would have 2 million left over.
2 million in the bank at 3.5% generates 70k per year. Minus some taxes. Taxes will vary, are you still working or not?
This doesn't take into consideration if you kept your houses, will they achieve growth over the next 10-20 years or what ever age you left.
Will those houses drop in value?

You can also use that 2 million and buy 4-6 houses much cheaper, and generate heaps more cashflow than 70k per year.

Do you have super or other investments to rely on?

There are so many different ways for each individual. There is no correct path as things change along the way. I always thought I'd retire by 44, but doesn't seem to be working out like that at the moment, I may need a few more years. And if something else occurs during my journey then who knows.

 

Let's see say capital gain is $1,000,000
less 50 per cent for holding over 12 months $500,000
taxed on $500,000 at 47 c marginal rate $235,000
effective tax rate is going to be a maximum of 23.5 percent

 

Yeah there is..and its based on inputs ie individual preferences/circumstances etc. thereforr different basex on inputs.

 

All of the above and anything else of value such as tobacco, the other stuff and of course skirt.

 

Here is a real life answer by Kierank:
Ins and outs of SMSF IP

 

Right. Which is a pretty big chunk of money I would prefer to avoid paying. It means that inflation adjusted you really need to make a pretty big gain to actually avoid losing money on your investment in real terms. This is the major concern I am trying to address.

 

Different needs or not, I still think there needs to be a "best return for money" type strategy. I've worked it out for many other types of investment, but am still struggling when it comes to oz property.

 

If there was , then everyone would be doing it. Besides, there cannot be a best option regardless of circumstance- risk is proportional to reward. Risk is an individual circumstantial parameter.

 

If you don't need the surplus cash then you could reinvest it. If you invest by holding long term assets then tax is deferred for capital gains.

However, I suspect an underlying question about estate planning. i.e. how do you tax effectively pass on the wealth to people you think deserve it - either before or after you become the richest man or woman in the graveyard.

You could keep going as you are and let a lot of undeserving relatives and supposedly financial dependents squabble over your estate - wills are not bullet proof. Even worse, you may become incapacitated and have to watch some incompetent ***** manage your affairs, likely with the assistance and advice of some hopelessly conflicted financial planner.

If you have a lot of property in your name then quality independent legal, financial and tax advice is recommended asap.

 

Thanks. My question is not really about estate planning! I started buying property in my 20s now early 40s. It really about the capital gains issue.

I don't see how buying assets for long term hold is a solution. To me that seems like delaying the inevitable.

I'm wondering there is some other solution. Eg on one block you build a new place for 1m and then you sell other for a 1 mil profit, as an example. Not sure if that works, but that kind of stuff. Otherwise, it seems to me that you have to massivly outperform inflation to even break even on a property investment in Oz.

 

Nice to see someone finally raise this question. Let's see if you get a reply, get total silence or get called a bear/negative or just clueless. Some just wont detail any strategy other than buy in capital city, hold whilst pumping in own money and wait for it to double in 10 years or less.

 

Hey big max, are you saying the issue you have is paying tax?