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Expense v Reward

Discussion in 'General Property Chat' started by Terry_w, 24th Nov, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If you could save $x per year but it could you $y one off, how much bigger to y does x have to be?

    e.g.
    Sell a $800,000 investment property
    and free up $400,000 in cash,
    use the cash to pay down the main residence loan,
    reborrow $400,000 to invest.

    Something like this may increase tax deductions by $400,000 x 5% = $20,000 pa.
    This may put $10k in your pocket each year as well as compounding effects.

    But the fees of selling may be say $20,000

    So would it be worth spending $20,000 once off to save $10k per year? You would make your money back in 2 years and thereafter it would be all savings. I think that would probably be worthwhile.

    But what if the costs were $40,000 and it took you 4 years?

    The expenses would be mainly CGT, but may also be stamp duty, and conveyancing costs for a transfer between spouses and I am trying to work out at what point it would be worth doing.

    What do you think?
     
  2. joel

    joel Well-Known Member

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    In my job we operate with a payback period of ~1 year for operating expenses.

    If a business generates $10 a year how much would you pay for it? 3x annual income? 5x?
    Saving money and making money has the same effect at the end of the day if it's the same net amount.

    Depends how patient you are and what other opportunities there are.
     
  3. B-Mac

    B-Mac Well-Known Member

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    I agree with @joel it that it depends heavily on what opportunities lie in the next purchase...
     
  4. Investing101

    Investing101 Well-Known Member

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    ha i'm in a similar predicament. I haven't got an answer for you Terry just a couple questions:

    How long do you intend for that PPOR to remain so? Are you gonna upgrade or downsize or move location anytime soon?
    Is the IP your thinking of selling a quality property? (worth letting 1 bird go at hope of catching 2 more?)
    How long till your next IP purchase? and how much do you anticipate spending on it? Will capital and income from sold IP affect this?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thanks Joel. Good answer
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    @B-Mac, you are missing the point. This is a debt recycling strategy and there may not necessarily be another property. Spouses may sell to each other for example.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    @Investing101 this is not for me, but the sort of thing I advise clients on. These are important questions and worth considering though.
     
  8. wogitalia

    wogitalia Well-Known Member

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    It's an interesting question but I think too much information is missing to really make a decision.

    How certain are you that your income will remain in the highest bracket and thus that the deduction will result in a 50% return on expenditure? If you lose your job tomorrow that deduction is worthless for example.

    It also ignores the ROI of that investment property and what you do with the 400k you've just restructured. If that investment is yielding say 10% then selling it carries with it a significant opportunity cost, if that 400k can't be used for some reason for a couple of years again there is a real opportunity cost. This side of the equation absolutely would come into the actual decision.

    Ignoring all that, I'd be wanting the restructure to be paid off within about the 2.5 year period because trying to plan outside that is just too unreliable. Too much can change in any more than that time frame, could lose your job as the obvious example but so many other things can happen overnight that completely change circumstances. To spend 20k on what is essentially a tax deduction is a pretty risky one off transaction in itself. Government could shut down negative gearing (they'd likely grandfather it but just an example!) and that whole move was for nil.
     
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