Why I'm happy to pay tax

I'm always puzzled by the " never sell " brigade who don't want to sell as they have to pay tax . We've sold some ( in nice and crappy areas ) , paid tax and paid off PPOR , sold others and now own weekender outright . We've kept others which are good renters and will sell others to pay these down . Aim is to have a fully owned ( or very minimal LVR ) portfolio which generates a good income.

If I don't pay tax on my capital gains , I have to earn more money ( which I pay tax on , on an ongoing basis ) to provide a roof over my head either via a PPOR mortgage or rent to someone else .

I'm not interested in drawing down equity and having an ever increasing amount of Debt as I have no control over what the banks might do in the future . Tax is just another cost of doing business .

Doing this minimises our ongoing expenses

Cliff

 

Sell and take an extended holiday!

 

I agree its just a cost of doing business and it also makes perfect sense. Depending on the goal and timeframe, once there is a great deal of equity built up eventually selling some to reduce debt, increase cash flow combined with other rental returns makes sense to me. Paying some tax is just a normal part of the process. The saying you cant enjoy equity, only cash flow is not only logical but its just true.

 

You absolutely want to be paying tax, aka making money, but you also should be doing your absolute best to pay as little tax as you possibly can (hence why property is such a good investment in Australia because of it's highly preferential tax treatment over anything else). Tax is an expense that you can minimise with good management and planning and is something that you should be paying as little of as possible.

This isn't like getting 3 quotes from a builder and maybe choosing the most expensive because you know the quality is better, this is an expense that paying as little as possible is always the best option (because let's be honest, the government is going to waste half of it anyway!).

 

Makes a lot of sense to me , knowing some of your background / position.

CGT isn't the only expense that should be considered though. There's also sales agents fees for selling and then stamp duty when you (eventually) replace the asset. Significant returns are needed just to break even.

 

Another point to raise , which Never gets mentioned re drawing down Equity , is , If circumstances change ( WHICH THEY DO ) and you have to sell , you will have to pay capital gains tax . If you've already paid you're self that capital gain via draw downs , if there has been a drop in value ( WHICH DOES HAPPEN ... ) , you may find yourself with a CGT bill which you can't pay .

I am aware of one forumite who was faced with this situation a few years ago.

Cliff

 

That's why CG or manufacturing equity is so important in this equation imo.

 

Yep

We've just got to around that break even point with our Brisbane purchases .

Cliff

 

How many years did that take?

 

Agree on this. I have no issue paying tax - usually just looking to make the structure a bit more effective.

 

That's hard work and time consuming , but will vary from person to person

The easiest gains we've made have been when the market is booming and we sit back and watch things go . We have also got caught out by doing a development ( we've done two subdivisions on Sydney's north Shore ) and seeing other ( easier ) opportunities passing by because we needed funds for our subdivision .

Cliff

 

Oh I agree @See Change, I wasn't meaning that 'manufacturing equity' is the only way to go as you have pointed out the inherent risks with some of those strategies, I was meaning either find ways to add value or buy well so you get good CG over time, which I think (kinda assuming) is the backbone of your success.

 

Rather be paying tax and making money

 

The ones which we started buying in the Goodna region around a year ago , would property cover transactions costs if we sold them now . Not selling them now ....

Cliff

 

I take money off the table because it makes financial sense because booms don't last forever as I have mentioned many times and you want to bail before markets peak/crashes, unless you are holding properties that generate cash flow.

Paying tax is part of business and strategies can be implemented to reduce tax, and my cost of doing business is a superior strategy than holding properties in a falling market that lose value and that I need to hold for another 7-10 year cycle missing out on future opportunities.

Some of my recent projects I sold in Perth - 3 villas Spearwood, 2 blocks of land Kardinya and 3 houses in Girrawheen. All these have dropped back by around 10% in real terms, this equates to around $350,000 - 400,000 is actual loss in value, huge.

My tax did not come close to this figure and I am sitting back cashed up and have reduced my risk, my debt. Perth is pretty ugly at the moment, and I don't see it recovering any time soon, some will say I dodged a bullet, but I will tell you it was planned because I saw it coming, it was very clear that the market was turning.

BTW the rents would not cover the debt, because when markets tank so do rents.

MTR

 

Have you thought about your longer term plans with the Goodna area properties? Will you ride the wave and release once you get decent gains? If it follows the last cycle these areas will drop again. Or will you just see how it plays out and decide at a later stage?

 

This is similar to what I tried to argue in
Tax Tip 28: Selling an IP to pay down non deductible debt

I think it is a good thing to sell, pay down non deductible debt and then reborrow to invest. It is a form of debt recycling.

 

At this stage , no definite plans .

No major drama's with renting properties so far , and good returns

We have other properties and if they Shot up and we can sell those with good gains , we may end up holding in Goodna .

Cliff

 

Juts out of curiousity Cliff, did you sell your first IP as well? I am happy to sell in the future but not sure if I want to sell my first IP. I guess it helps that it is in a nice location, healthy CG and opportunities for the future.

 

@See Change do you also see selling a good strategy to keep that money working more efficiently in the next markets boom?
Eg goodna, in say 3 yrs you sell at the peak (pay tax etc) then use that too put into the next boom rather than having goodna go sideways for the next ~6yrs