Long term negative gearing strategies

I have a query regarding negative gearing which would apply in the longer term scenario where rental return has increased to the point where a property becomes positively geared (or other sources of income are deposited in the offset account thereby reducing interest payment deduction). Let's assume you have 4-5 IPs, and the portfolio as a whole has become positively geared. You can withdraw from your offset accounts and purchase another IP, but let's say you want to keep thing managable at 5 properties max.

What sort of strategies can be used to manage the additional tax burden in this case? Do you start turning over property and selling one to finance another (more expensive and thus pushing the gearing back towards nuetral or negative territory), or something else?

 

Personally my strategy would be to enjoy the fact that I was making money and not go out of my way to try and lose it on some other 'investment' for the sake of trying to get back 47c for each dollar.

 

Is the income enough to retire on? If yes then retire. That'll decrease your taxable income

 

Negative gearing is not a goal.
It's a consequence, and at times a necessary one in view of the greater good.
The more tax you pay, the more money you are making. Give me that any day.

 

One of the aims of property investing is to generate an income from it. By definition, this is part of positive gearing. You're making a profit on income, therefore you have to pay income tax. Purchasing property simply for the objective of not paying tax is counter productive.

You appear to be thinking in terms of a PAYG employee where peoples employer pays them a NET income and holding the income tax component of their income. This allows the employee to spend all the money they receive, abdicating the responsibility for their tax liability to their employee.

The best strategy to handle multiple positively geared properties is to do what any good business owner does. Understand what your tax liability will be in advance, set the money aside, then pay the tax bill when it's due.

Selling a property a property and buying another simply to for gearing sake is silly.
1. You reduce your cash flow position.
2. You pay a lot of tax in selling one property (CGT) and buying the next one (stamp duty).

 

@Bran I have put myself in a NG situation many, many times in the short to medium terms (mostly with exit plans) to realise the larger goal/profits. Being in a NG situation is not good or bad. It just is. And it has a bad name to many who simply lack the understanding of its use.

I have not been disappointed yet putting myself in negatively geared situations to realise the bigger picture.

 

Sadly I have.
Hasn't stopped me doing it again and again though

 

Sorry to hear that @Bran. There is always risk my friend as i'm sure you know. All we can do as investors is mitigate them as much as possible if we think the profits are worthwhile. btw any update on on that place..?

 

Ha ha. Speaking of negative gearing! I've made offers on two others since. I'm going to bail. I don't think I can turn it around quickly enough, and at a 2.3% yield, it would hurt a lot.

 

@Bran yeah mate...2.3% at the amount you’re looking at...scary stuff...

On the bright site, Bali will be awesome! Some rejuvenation time!

 

Thanks Peter for a more carefully considered response. I'm thinking in terms of a long term investor who understands the concept that tax leakage decreases long term returns. There are many incorrect assumptions in the responses to this thread. eg: that people purchase property just to avoid paying tax, or that being negatively geared means you're losing money (that response is ridiculous because it assumes you will never sell a property at some future point in order to make a capital gain!), or that negative gearing is a goal. These are all wrong. I think a realistic situation should be to assume that most people invest in property to build long term wealth, and one aspect of that overall strategy is minimising tax prior to retirement age. I am invested in both stocks and real estate, yet a core component of overall equities investment strategy is finely tuned management of tax leakage because it is well understood this acts like a cost which impacts NET return. The fact is that tax is a cost of doing business, and there are various ways of reducing that cost. If you ignore that aspect of property investing, then you're sure to reduce your overall net return in the long run.

Not a single response about SMSFs, family trusts, setting up an investment company etc? Nobody has any experience with any of these tax minimisation methods?

 

Ha ha.
Bail, not Bali. I'm not going anywhere

 

me too

 

@Bran you can tell I had Bali on my mind.....

 

These are longer term tax minimisation strategies, not immediate ones. You can't negatively gear through most trust structures including SMSFs, hence it's outside of the scope of the original question.

Trusts and SMSFs can be used to minimise an individuals tax via distribution of profits in later years (a discressionary trust), or when an SMSF is in pension phase.

 

If you wanted advice on smsfs, trusts etc, why not write that directly in your question? You'll get more specific information in your area of interest without belittling the people that tried to give you advice based on the information that you did supply.

Their answers that "you only pay tax if you are making money" seem valid. You allude to already owning property and wanting to avoid tax, not "how do I structure my future properties to avoid tax"

A carefully considered question is more likely to get a carefully considered response. Imply that everyone have poor answers and I doubt people will try to help guide you in a useful direction.

You can't sell a property you own to your own smsf so you were never going to get that as a response to your question on tax avoidance.