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IP getting close to neutral - or have I misunderstood?

Discussion in 'Accounting & Tax' started by Joynz, 23rd Jul, 2016.

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  1. Joynz

    Joynz Well-Known Member

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    Hi
    I bought an IP on a bit of an impulse almost three years ago. I had been working at an extra part time job and my salary was climbing over $80,000 - so into a new bracket. Also, I had saved quite a bit and was going to be paying tax on the income from the savings account - horror!

    Anyway, I just did my tax spreadsheet, ready to send to my accountant and it looks like I only spent $500 more than the rental income, including all costs. Does that mean it is almost 'neutral' or have I misunderstood? (I was actually happy to be negatively geared!)

    My initial aim with the property was to bring taxable income down to $80,000 so I don't think that is going to work this year. The other aim was to get tenants to help pay off the property.

    Should I be doing something differently?

    The property was purchased for $565,000 in Cheltenham Vic, and I have paid $100,000 into the offset so far. (Own my very run down, semi construction site popr outright.)

    Unlike the other forum members, I'm not a sophisticated investor. I don't really have a plan (not super confident about investing).
     
  2. WattleIdo

    WattleIdo renovating Premium Member

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    It's looking very neutral. What a very high level problem you have given yourself. ;)
     
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  3. Scott No Mates

    Scott No Mates Well-Known Member

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    Have you taken into account depreciation and interest?
     
  4. Phase2

    Phase2 Well-Known Member

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    Don't assume we are all sophisticated investors. :) I'm sure we are all over the place on the learning curve. I'm somewhere near the bottom.

    To answer your first question, yep you are pretty much neutrally geared if you're paying I/O. "Gearing" is just a fancy word for using leverage, or borrowing, to buy an asset of some kind. If you're negative, then outgoings are more than income, if you're neutral then outgoings = income, and positive means income is more than outgoings. Note outgoing costs don't include principal repayments, just interest.

    According to the media and the greens though, "Negative Gearing" for property is a magic formula that makes greedy property investors super rich at the expense of everyone else! It's different to negative gearing in other asset classes... apparently.

    Should you be doing something differently? I don't know. What do you want to achieve? Owning your Ppor and having $100k in the offset against the IP is a pretty awesome 'start'.

    If you're looking to buy again, I'd directly contact one of the experienced MBs here, to help you sort out structures, optimising loans etc.
     
  5. Satya

    Satya Active Member

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    I would personally prefer positively geared property than negatively geared. Please bare in mind when you are negatively gearing property you are paying about 70% of losses yourself and only claiming 30% from taxman (assuming your tax bracket is 30%). Negatively geared property is only good if your value of property is increasing way higher than what your losses are.

    If you have a depreciation schedule done for your property, you may be able to reduce your taxable income by few thousands (depending on your property's depreciation that year). Newer property has higher depreciation so works well for new properties. Worth speaking to Depreciation schedule makers and see if its worth doing depreciation schedule for your property.

    Good luck mate.
     
  6. kierank

    kierank Well-Known Member

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    @Joynz, be careful. You might end up paying more tax very soon.

    I love paying tax. I would love to pay $1M every year :) :).
     
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  7. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    This maybe helpful (or not)... get your depreciation schedule done and consider buying a second IP if you are comfortable with that thought!
    Still... having your IP give you cashflow (and hence, additional taxes) is not the worst thing in the world.
    All comes back to your level of comfort in taking on more debt.
    I think you can since your PPOR is paid off and there's substantial funds sitting in an IP offset. But please do what feels right for your own SANF. :)
     
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  8. Joynz

    Joynz Well-Known Member

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    Yes, includes interest, and haven't raised the rent at all in the whole time.
     
  9. Joynz

    Joynz Well-Known Member

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    Thanks. My IP is around 50 years old so not sure if there is much depreciating to do...just based on my understanding of some of the posts in other threads.

    However, I'm planning to put in a new roller garage door. Is that the sort of thing you mean?
     
    Last edited: 23rd Jul, 2016
  10. Phase2

    Phase2 Well-Known Member

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    Might be worth getting a quantity surveyor in to do a depreciation schedule then. Carpets, curtains, hot water systems, major repairs/renovations, air con etc can all be depreciated. It'll cost you a few hundred but likely worth it. Cost of q.s. is tax deductible too.

    If you're planning on updating/renovating it's worth telling the surveyor, as they can give you a scrapping schedule for the stuff you're going to get rid of e.g. Garage door. Instant write-off (I think).
     
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  11. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    I would think so too.
     
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  12. Satya

    Satya Active Member

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    I did depreciation schedule for my 30 years old property and I could deduct about 5 k in first 5 years including quantity surveyor's fee. So worth checking with them before engaging them. They can tell if its worth doing it. The one I used was BMT Tax Depreciation. They are pretty good. I think I paid around $700 as their fee at that time.

    As @Phase2 said, you can deduct carpets, curtains, general weear and tear etc on the depreciation regardless of the age of property. If you or previous owner have recently renovated the property, that could also be considered in your depreciation schedule.

    Let us know how you go mate.
     
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  13. Joynz

    Joynz Well-Known Member

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    Thank you for that.

    I purchased new curtains for the property a couple of years ago and the accountant said I would need to claim over a few years, not all at once ( same for the garage door when I put it in). Is that depreciating it?

    No carpets, but I will be doing some renos and improvements eventually.
     
  14. Phase2

    Phase2 Well-Known Member

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    Yep. Depreciation basically accounts for the cost of something over its lifetime. Eg you might expect a garage door to last 20 years, so each year you could claim 1/20 or 5% of the total supply and install cost. There are a few methods that can be used to calculate it, I just gave a very simple example.

    I also used BMT and was happy with their service. They'll work out depreciation schedules for you and you can decide which method to use. Note that once you choose a particular schedule, you must stick it to it for every subsequent tax return.
     
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  15. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    How long have you owned it?
     
  16. D.T.

    D.T. Adelaide Property Manager Business Member

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    I thought investing was about making money?
     
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  17. Joynz

    Joynz Well-Known Member

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    Two years and eight months
     
  18. BMT Tax Depreciation

    BMT Tax Depreciation Chris Business Member

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    Sight unseen, it's worth it, particularly if you can lodge an amendment for previous returns. If you want to message me the address I'll see if I can see some pictures and give you something more precise in terms of an estimated result.
     
  19. Scott No Mates

    Scott No Mates Well-Known Member

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    Oh. I thought that there was a basic concept that the gurus skimmed over.....
    Underpants........?.........Profit!
     
  20. Phase2

    Phase2 Well-Known Member

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    Ha! The origin of my 'handle'. :) (for those that never seen Southpark)
     
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