Operation 2016

Where's the income?

Agreed the spreadsheet will be wrong and it's all dependent on the assumptions.

But even then $2m may sound like a lot now but in 2022 it may not be that much.

And it has to last you both potentially 50 years or more. Any sort of retirement that just relies on drawing down $2m will be pretty meagre over that time frame. So for my mind whether you have $2m or $1m or whatever is pretty irrelevant. That amount of capital has to be maintained and supply you an income that stays constant in real terms pretty much indefinitely. So if it returns 5% in the bank and we have inflation of 3% you only get to live off 2% if you want to maintain the value of your capital (and personally I think CPI gets under-estimated in official figures). Add some variation to those numbers and you can see how you slip backwards pretty easily. That's $40k per year between 2 people, if you're lucky... $20k each or a "povvo" retirement.

The question for me is what passive income will you have after all your expenses including interest with this portfolio? And how reliable is that income?

The best predictor of that is what is your current passive income after all expenses and tax? Is that enough for your lifestyle? That way the properties can maintain the real value of your investment and you can live off the rent they provide. If you can't do that then I think ur getting ahead of yourself...

Just my opinion!
 
By the way, the 6 year rule only helps you if you didn't move into another PPOR afterwards. If you move into a house you own, there is no 6 year benefit on the previous PPOR - you apportion CGT from that day on as you can only claim one PPOR at a time.

Just my understanding but I'm no expert - no doubt they will be along shortly...
 
dredfern said:
What about if he did live in it first, then moved out.
For example I lived in my place first, and now I rent it out. (while I rent)
If I sell after 10 years (without moving back in) what period will I pay CGT on? (is it just the last 4 years)
Click to expand...

I think the legislation is unclear on this.

One view which is in an ATO publication is that the exemption can apply for 6 years so CGT would only apply on the period over this period. ie a partial exemption applies.

Losses and CGT minutes, June 2010
see 10. Application of section 118-145 of the ITAA 1997
Question 2
http://www.ato.gov.au/taxprofessionals/content.aspx?menuid=0&doc=/content/00260551.htm&page=14&H14
 
investor2009 said:
Hi everyone :)

We purchased the home with the FHOG & FHOB. Rented it for 11 months, and then moved in where a local REA friend of mine wrote up an appraisal. The market had moved approximately $5000 so I believe we are taxed on $5000 if we beat the 6-year rule which began ticking the day we moved out in-to our new PPOR.
Click to expand...

Incorrect. Because the property was rented before you lived in it you cannot use this method for calculating CGT. The appraisal/valuation method only applies when you lived in the property first and then rented it out. You will have to apportion any capital gain based on the number of days the property was rented compared to the number of days it was your PPR.

The house was leased to the DHA and we could not move in-to it. It was physically impossible. Rules are rules.

See below copy and paste direct from the ATO' website, this should clear things up a little for you.

The property must have been your main residence

To qualify for a full CGT exemption, the property must have been your main residence from when you acquired it. If you move out of the property and rent it out, you can continue to claim an exemption from CGT for up to six years after you move out. If you do not rent it out, you can claim a CGT exemption for it for an indefinite period after you move out.

The property was our main residence from the day we aquired it. We had to rent until such time the DHA lease expired. This is quite common among buyers and many properties have existing leases that cannot be broken.

Worst case: We can move back in after 5 years and create a new 6 year when we move out. Whatever suits at the time.
Click to expand...

For tax purposes the property was not your main residence from the day you acquired it.You rented the property first before it was your main residence. Even if there is an existing lease in place when you purchase the property the ATO does not give an exemption. Therefore you cannot claim the PPR 6 year exemption.

Quote from ATO below

Moving into a dwelling
Moving in
A dwelling is considered to be your main residence from the time you acquired your ownership interest in it if you moved into it as soon as practicable after that time. If you purchased the dwelling, this would generally be when the contract is entered into, not the date of settlement of the purchase contract.

However, if there is a delay in moving in because of illness or other unforseen circumstances and you move into the dwelling as soon as the cause of the delay is removed - for example, you recover from the illness - the exemption may still be available from the time you acquired your ownership interest in the dwelling.

If you could not move in because the dwelling was being rented to someone, you are not considered to have moved in as soon as practicable after you acquired your ownership interest.

Link below:

http://www.ato.gov.au/individuals/content.aspx?doc=/content/36888.htm
 
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Ohh, good question Hi Equity. I didn't go into detail with this in my initial post.

Our income at the beginning (first year) of freedom is expected to be (around) as expected from standard growth, which could be less, could be more as we know.

No matter what it looks like, we plan to use savings (cash) to do as we please for that first and possibly second year while our financial position gets stronger. So in reality we have waited 7 years from today before we even possibly plan on using any of this equity for personal use. We also have a positive cashflow and don't need much to get by. It's about freedom to us, not truckloads of cash at that point in time.

In fact, we actually plan on working part time or creating our own business because really, we have plenty of time on our side and bigger and better things to do that sit on a stable, but relatively small retirement income.

We plan to watch our portfolio grow and grow over (possibly) decades before we decide wether or not to convert our assets to cash or other classes of income.

The great thing is: We will have the equity (ability) there to use if need be and we see nothing wrong with taking 2% to take a year off and just travel. And thats just 2% of our equity, which is less than 1% of our portfolio value. It doesn't even register on the scale for us.


In regard to the CGT, I've put the question to our accountant, will give the final verdict whenever we get it. Whatever way you look at it, we're miles (30 years) ahead of the majority, and proud of our achievements no matter what.

I'd like to put the definition of financial freedom to you (as stated by Robert Kiyosaki)
'When your income is MORE than your expenses, you are financially free' Period.
 
UPDATE:

It's been 2-years since posting Operation 2016 and here's our most recent developments. The Wife has removed herself from the evil employer of 7-years out of pure stress with my 100% approval and taken another lower paying job. I just paid out something she had financed that was milking cashflow so she has X amount more each week to help her along but she still can only just scrape by with mortgage repayments and bills.

I have been in casual employment doing a physical labour job I dislike (suprise suprise) and my back has been killing me for months now and is not getting any better. The job may last another week or a maximum of 3 more months. I've just about run dry of cashflow but thats because of the recent payout, the job is very high paying though so it should replenish a bit as time goes by.

In light of these circumstances, I can't go on making my Wife hand over all her working funds so did some math.

If we sell 2x properties now, what will the sums look like? Well, they look almost as good if we'd waited another 2 years and made it to 2016. We halve our mortgage, halve repayments and can relax a little. My goal is to be able to take a few months off every year for now and I feel I can achieve this by selling now, which feels great!

Our aim has always been to be 'financially free' and this will take us much closer to that goal.

The sums: Once we sell some of the portfolio we will be down to $1.1M in assets at a 60%LVR and at just 4%PA in 5-years we would theoretically be sitting @ $650k equity and a 50% LVR which is ok but not great. It still suits our goals though which is the main thing and holding onto cashflow draining property does not do that. For the shorter term at least.

We will replenish at least one property after selling for now. Maybe commercial, maybe cashflow positive, not too sure just yet so that we can then have something else working for us later on down the track. This might take our portfolio up to $1,550,000 with $380k equity and a 76%LVR.
Place a 5-year scenario against what we have now at a 4%P/A growth rate and you get the following figures:

Portfolio as it is now while working very hard $2M val, $460k equity. And values when liquidated and collected 1x more 105% financed property at todays interest rate and rental returns = $1,55M val and $380,000 equity with the same 76%LVR. Our equity and capital holdings are lower, but we also save $90,000 in mortgage interest in the same period. At the end of that 5-years the total equity difference is quite negligable @ only $30,000. So to me, working those extra 5-years would almost be for absolutely no reward. Does this make good financial and mental sense? No.

I'm glad things have recently worked out the way they have and it just goes to show. Seemingly bad circumstances are usually a good thing in discuise.

We also don't plan on doing the whole CGT free thing on that property that used to be out home, we're going to just save that for where we are now. We will one day upgrade once the mortgage is really low and upgrade to a 'nicer' home with a low mortgage. We don't EVER want to have to go through the work hours, pain and stress we have these past 10 years. The portfolio can now work for us.

In regard to the earlier discussions about investing more into your career. Well it turns out I do have one I love and I'd like to just be able to do that full time which is another exciting thing for me! I play music in a rock cover group, have been doing so for the past 10 years semi professionally. Which has helped aid my cashflow after tax cause I'm able to claim that as a business. It can now make up around half my yearly expenses and if I only work in ajob for a few months, putting away all I can then I can just play music a few nights a week, drink beers with the boys and get paid. That aint' workin' and It's what I love to do. I really don't believe there would be anything else I'd love to do as a job because it suits my personality to a T. I don't like to work much but I like to be paid okay, and I want to enjoy the work I do-do. Fits perfectly.
 
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Update: Property #1 sold. Paying down some mortgage and investing in SE Asia mini retirement. Property #2 to go on the market next financial year.

Enjoying my new full time day job (which is weird..) we're considering the possibility of moving interstate (Northern Rivers) for a lifestyle change and to be near Dad. Which would be good and bad. Good: very small mortgage and great lifestyle. Bad: not much work and possibly hard to sell property if need be.
 
FINAL UPDATE:

Well it's not quite 2016 and I've just semi retired(.. !!!) My employer is happy to have me whenever I'd like to work which is currently 2 days per week and knows my reasons. This has come at the perfect time because I've just arrived at the goal post and work has slower right down. The Boss didn't want to let me go so was payinf me to not do much so is happy to know I'm happy to go part time or no time depending and nor be looking for another job. It's win-win

It took me 10 years to make it and I've been enjoying having the time to do as I please just as much as I thought I would. It's fantastic

The Wife & I have sold some assetts to pay off debt and replenished the portfolio back to it's original value. One property went from giving us an annyal income of $2,000 to $12,00) just by changing property management which has sped the process


Our yearly expenses have quartered and we no longer need to work to pay tax to claim back each year for negative gearing as part of our long term invedtment plan of CG and now have switched to pos CF so we pay tax, which means we make a cashflow profit, just the same as someone with a job

I'm elated we've finally arrived. At 34 & 39 years young and 10 years hard work, never losing sight of the big picture. We kick it off with a few months O/S shortly

Things I've learned aling the way? Have a plan, constantly reasess, never waiver

This is my final post here on SS and intended for the newer community members like I 10 years ago. SS helped me immensly in the first fee years as I learned about PI but quickly turned negative toward the end of my stay and was onlycouter productive for me

Since I left SS with my own personal knowledge and wisdom I ve been able to trancend the next step in actually realising my (and our) dream. The progress I've made since leaving SS and the peace I feel means I will not be back but appreciate those early members. You know who you are

I couldn't leave this post unanswered and hope it inspires someone

Jez
 
Great ending to the story.

I always enjoy stories of early retirement as it is a goal I aspire to.

I don't understand why Jez feels the need to leave the forum when there is so much more that he can share and learn.
 
Great to hear from you again Jez

Awesome effort at 34 & 39 years, I'm sure you'll still keep busy

Do you have any numbers re: the above for retirement (you know we love numbers) :D
 
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