Meet Steve The Tradie
Invest And Leverage Negative Gearing For Capital Growth
Steve’s a builder. He doesn’t own a business, works for someone else and has an industry superannuation fund because he just doesn’t have the time to worry about stuff like shares, funds and tax compliance.
He knows the property market is strong and resilient – just looking at all the renovation shows on TV and the work he does everyday tells him that landed property is a good investment. Over the years, he has saved up $50,000 and is ready to enter the investment property market.
Steve’s deposit on a $425,000 villa is just a 11.8% deposit. He really cannot afford more than this and so his investment property choices in and around the city are limited. A lot of older, small 2 bedroom units that require renovation. That might be okay if he had the time, after all, he’s a builder but time is money and he just does not have enough of either.
A tradie mate of Steve’s put him onto brand new investment villa’s on the Mornington Peninsula. No maintenance, no land scaping, everything included and ready to lease. Better still, as his accountant advised, the high depreciation of the brand new property meant that his tax deductions would be far better than an older property. But to invest with only $50,000 deposit means he’s highly geared (in debt) and is facing a large annual interest bill of around $21,000. There’s also around $2,000 in annual expenses — such as rates and owner’s corporation fees.
With rental income on the 2 bedroom villa around $1500/month, then overall, that’s a loss of $5,000 a year. This isn’t as bad as it seems. Steve could use this $5,000 loss to reduce his taxable income, thus reducing his tax bill.
Let’s assume that Steve can offset the $5,000 against his taxable income, bringing his tax bill down by $1,650. Now his out-of-pocket costs are only $3,350.
Given his ultimate goal of long-term capital growth, Steve’s comfortable making a $3,350 loss each year. After all, that is less than what he spends on smokes and takeaway for the year – time to quit and pack a home-made lunch!
Steve also discovered during his annual visit to his accountant that this loss could be further reduced if he set up a Self Managed Super Fund and structured the investment as part of his SMSF’s investment strategy – now he is really thinking long term and capturing tax effective capital growth – nice one Steve!
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