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  1. #1

    Default When/how to pay off investment properties?

    This is a hypothetical question.

    But lets say you have 4 IPs, all of which have been sitting just above neutrally geared. In the mean time you have been saving and have lump sum of cash, enough to pay off the debt of all 4. You are also nearing retirement and about to leave your job.

    Is it legal to wait until the new tax year (when have zero income) to pay off all 4 houses and thus incur no extra tax (outside rent)?
    Last edited by motoman; 27-11-2013 at 04:20 PM.

  2. #2
    Join Date
    May 2007
    Location
    Hamilton
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    3,656

    Default

    Legal, but most likely dumb.

    Say in your example worth $1 million for 4 IPs

    $1 million loan will be incurring interest, say 5.95% for 2 years fixed

    $1 milllon invested will be earning 4.5% for 2 years fixed.

    So losing 1.5% on your $1 million or $15,000 per year

    On the interest paid you are receiving a tax deduction.
    On the interest received you are paying tax.

    So main part you are missing is that you are paying tax on the interest income from have the money in the bank.

    On 33% tax bracket you would get tax deduction on extra interest paid, but would still be $10,000 worse off

    Ross
    Not sure where to start, book a free chat for 5-10 minutes https://cswaikato.co.nz/services-pro...s-hamilton/201
    Ross Barnett - Coombe Smith Property Accountants


  3. #3

    Default

    how do you realise a profit then if you are never exiting?

  4. #4
    Join Date
    Mar 2007
    Location
    Auckland
    Posts
    3,071

    Default

    When you are retired you want income.

    Capital gain becomes secondary - you can't chop a bit off the property to pay for bread, milk and rates.

  5. #5

    Default

    that is indeed the question, would it be more sense to pay out the loans (so to receive soley rental income) during a year not working? to avoid higher income tax.

  6. #6
    Join Date
    May 2007
    Location
    Hamilton
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    3,656

    Default

    As above yes, better to put your money in the mortgage to save the 6% interest cost.

    With your money in the bank, you are also receiving interest.

    So with the $1 million example above, you will save $15,000 being the difference between the mortgage interest rate and your investment interest rate. From this you will lose $5,000 tax advantage, but still be $10,000 better off.

    Generally you pay $3 (say to the Bank), to get $1 back in tax. So you are still losing $2 in the middle. Best to limit your interest cost, thereby not paying the $3.

    By waiting a year until you are not working, just means you are losing on the difference between the interest rates for that year. Best to pay it off now.

    Ross
    Not sure where to start, book a free chat for 5-10 minutes https://cswaikato.co.nz/services-pro...s-hamilton/201
    Ross Barnett - Coombe Smith Property Accountants


  7. #7
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,656

    Default

    Where did you mention exiting or realising a profit.

    You asked if it was legal to not pay off the loans and to have cash in your bank.

    The answer is yes it is legal.

    The second part "and thus incur no extra tax (outside rent)?", is wrong. You are still paying tax on the interest you are receiving on this investment.

    Generally at any point the best straight financial investment is to put your extra cash or investments into your mortgage. Thereby saving interest. You might pay more tax, but that is because you are making more money and are better off!

    To start getting good cashflow from your rentals, you should have been putting your cash into the mortgages (presuming your own house is debt free) earlier. So I have no problem with you putting money into paying down the loans.

    Ross
    Not sure where to start, book a free chat for 5-10 minutes https://cswaikato.co.nz/services-pro...s-hamilton/201
    Ross Barnett - Coombe Smith Property Accountants


  8. #8
    Join Date
    Oct 2013
    Posts
    1,680

    Default

    To be it looks as though Moto has got the concept of paying down mortgage principal confused with a taxable event.

    Paying down your mortgage won't cost you any tax, ever. You're taxed on your profits. The extra tax comes from having to pay less interest on the loans (because they are gone) which means less deductible expenditure, higher profits.

    Doesn't make a difference whether you pay down the loans in a year where you have low income, or high income, because paying down the loans isn't a taxable event (though there may be bank fees involved, depending on your circumstances).

    As said above, you're much better off to pay down the loans now. Though I'd like to add the proviso "if you don't need that money in the near future".

    Once you pay down the loans, your tax bill increases for every subsequent year, because you're making lots of profit. But the tax man only takes 28% or 33% of your money, less in later years when your income is lower. Surely it is better to make $67 than $0, even if you are paying lots of tax.

  9. #9
    Join Date
    Jun 2013
    Posts
    2,158

    Default

    Quote Originally Posted by Anthonyacat View Post
    Once you pay down the loans, your tax bill increases for every subsequent year, because you're making lots of profit. But the tax man only takes 28% or 33% of your money, less in later years when your income is lower. Surely it is better to make $67 than $0, even if you are paying lots of tax.
    I think that point is often lost on some people!

  10. #10
    Join Date
    Sep 2013
    Location
    Auckland
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    3,885

    Default

    Quote Originally Posted by motoman View Post
    This is a hypothetical question.

    But lets say you have 4 IPs, all of which have been sitting just above neutrally geared. In the mean time you have been saving and have lump sum of cash, enough to pay off the debt of all 4. You are also nearing retirement and about to leave your job.

    Is it legal to wait until the new tax year (when have zero income) to pay off all 4 houses and thus incur no extra tax (outside rent)?

    Why would you have enough cash in the bank to pay off 4 IPs, and NOT do something with the money????

    Conservatively you should have paid off the mortgages. Having excess rental income is way better than paying the bank isn't it?

    More agressively, you should have used the cash to buy 4 more IPs...


    Anyways, back to topic, pay the mortgages off.


 

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