MichaelRoss
May 22, 2008, 03:26 PM
Ankesh,
Thanks for asking about the Never Sell.
Different countries might have slightly different rules on this. I don't know the rules of those countries so only go by what effects me in the country I live in. ok.
Down here it goes like this...
If you sell your primary residence - the place you call home - after living in it for 12 months, you are NOT subject to tax on any money you made. However, IF you sell within 12 months, then the Profit you made - difference between what you bought for and what you sell for - is subject to Capital Gains Tax (50% of the profit is added to your normal income - if you are allowed all the concessions - and you are taxed accordingly).
Investment property is subject to Capital Gains Tax regardless of when you sell it, when you bought or, or how the value increased (due to renovation or time or supply and demand).
So that property you bought for $100k which you sell for $220k has a $120k Capital Gain. 50% of that - $60k is added to your income for the year and subject to the relevant rate of tax for that income level - and there is a good chance it will be subject to the highest rate of 50%.. So you'll owe the Tax Man $30k.
Not only that, but when you sell you Also pay Real Estate Agent Commissions. In my state that is 5% of the first $18k and then 2.5% of the rest, PLUS 10% Goods and Services Tax. And for our example property, that $220k sale would probably cost around $6 in commissions.
So the sale loses you $36k.
Plus, you now do not have anything to make you money. You've just got the cash. And if you want to reinvest into property again, you'll be hit with... Land Tax and the Commission on the new place will be part of the sales price so you'll be paying that too. If the property is around the same value, you'll be hit with $5k land tax, another $6k in agent commission, plus loan stamp duty and the other BS costs of buying. Most likely it'll cost you $15k to buy.
So now you've lost/spent $51k to sell and buy.
If you never sell you can draw down the equity. Loans are NOT subject to tax. So of that $120k equity increase you can probably drawn down around $80k and not pay tax on it at all.
Plus, you still have a tenant who is paying the interest on that additional borrowing. So no money out of your pocket.
AND you still have a property which will go up over time and allow you to dip into the equity again at a later point. And at a later point, that $220k place will have doubled in price and be worth around $440k. And the available equity will probably be around $170k - an amount which, if taken out, will NOT be subject to tax. And you'll be right because the tenant is paying the interest and you still have an Assess which can go up in value.
So to sum it up... by never selling you can drawn down the equity and get your money - just like what happens when you sell - but you do NOT pay tax on it.
If you had a few properties you could draw down Some of the equity from a different property each year and basically live an income-tax free life as the rent the tenant pays covers tax on the rent plus interest on the loan.
BTW, somewhere on the archives Thomas Rice also did a rundown of Buy/Sell Stocks v Buy&Hold. Buy & Hold wins hands down.
Michael Ross
Thanks for asking about the Never Sell.
Different countries might have slightly different rules on this. I don't know the rules of those countries so only go by what effects me in the country I live in. ok.
Down here it goes like this...
If you sell your primary residence - the place you call home - after living in it for 12 months, you are NOT subject to tax on any money you made. However, IF you sell within 12 months, then the Profit you made - difference between what you bought for and what you sell for - is subject to Capital Gains Tax (50% of the profit is added to your normal income - if you are allowed all the concessions - and you are taxed accordingly).
Investment property is subject to Capital Gains Tax regardless of when you sell it, when you bought or, or how the value increased (due to renovation or time or supply and demand).
So that property you bought for $100k which you sell for $220k has a $120k Capital Gain. 50% of that - $60k is added to your income for the year and subject to the relevant rate of tax for that income level - and there is a good chance it will be subject to the highest rate of 50%.. So you'll owe the Tax Man $30k.
Not only that, but when you sell you Also pay Real Estate Agent Commissions. In my state that is 5% of the first $18k and then 2.5% of the rest, PLUS 10% Goods and Services Tax. And for our example property, that $220k sale would probably cost around $6 in commissions.
So the sale loses you $36k.
Plus, you now do not have anything to make you money. You've just got the cash. And if you want to reinvest into property again, you'll be hit with... Land Tax and the Commission on the new place will be part of the sales price so you'll be paying that too. If the property is around the same value, you'll be hit with $5k land tax, another $6k in agent commission, plus loan stamp duty and the other BS costs of buying. Most likely it'll cost you $15k to buy.
So now you've lost/spent $51k to sell and buy.
If you never sell you can draw down the equity. Loans are NOT subject to tax. So of that $120k equity increase you can probably drawn down around $80k and not pay tax on it at all.
Plus, you still have a tenant who is paying the interest on that additional borrowing. So no money out of your pocket.
AND you still have a property which will go up over time and allow you to dip into the equity again at a later point. And at a later point, that $220k place will have doubled in price and be worth around $440k. And the available equity will probably be around $170k - an amount which, if taken out, will NOT be subject to tax. And you'll be right because the tenant is paying the interest and you still have an Assess which can go up in value.
So to sum it up... by never selling you can drawn down the equity and get your money - just like what happens when you sell - but you do NOT pay tax on it.
If you had a few properties you could draw down Some of the equity from a different property each year and basically live an income-tax free life as the rent the tenant pays covers tax on the rent plus interest on the loan.
BTW, somewhere on the archives Thomas Rice also did a rundown of Buy/Sell Stocks v Buy&Hold. Buy & Hold wins hands down.
Michael Ross
