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brains
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tonyd,
i was impressed, i just didnt understand it.
i was impressed, i just didnt understand it.
Q re paying interest in advance yearly
- Thread starter raoul
- Start date
Can I just have some clarification on that since I have never paid interest in advance.
So if you have to borrow money to pre-pay interest you are not in front unless it lowers your tax bracket so you pay less tax? Is this correct? I have CGT that will be paid this financial year so would pre-paying interest help? I suppose you have to look at the actual numbers and see if they add up or not.
I'll have to re-read Jan's book. You know a book is good if every time you pick it up you see something that you didn't realise last time you read it. (The Richest Man is Babylon is one of these. Knowledge is more valuable than sacks of gold. Knowledge = Riches. A bit of action thrown in doesn't hurt either!)
Cheers!
Landholdings.
(Where are all you accountants hiding?)
So if you have to borrow money to pre-pay interest you are not in front unless it lowers your tax bracket so you pay less tax? Is this correct? I have CGT that will be paid this financial year so would pre-paying interest help? I suppose you have to look at the actual numbers and see if they add up or not.
I'll have to re-read Jan's book. You know a book is good if every time you pick it up you see something that you didn't realise last time you read it. (The Richest Man is Babylon is one of these. Knowledge is more valuable than sacks of gold. Knowledge = Riches. A bit of action thrown in doesn't hurt either!)
Cheers!
Landholdings.
(Where are all you accountants hiding?)
I deliberately didn't try and state whether I thought it was a good idea or not to prepay interest in advance. I'm a numbers man so I was more interested in the numbers.
The only thing the tax-bracket contributes to this equation is how much of a refund you get back against your tax deductible expense. The higher the tax bracket, the more the tax man pays of your tax deductible expense.
But, the tax bracket still balances things out because income incurs less tax and tax deductible expenses produce less of a tax saving. Without doing any numbers, I would suggest the numbers still align, regardless of the tax bracket.
Prepaying your interest one year in advance is simply giving you a bigger tax deduction in one year at the tradeoff of a slight loss every other year. That slight loss is the "alternative use" you could have put that prepaid interest to work doing something else.
But if you were holding property for the long term, the big "refund" or "tax saving" you might make in the first year may well be worth the slight loss you incur every other year.
The buying power of $1 gets progressively smaller every year (remember when you could buy 20cents of chips and 2cent potato cakes, for example, whereas now it's $2.00 and 50 cent potato cakes), so even though you may have to pay back some of that tax in the final year when a property is sold (because you would have already prepaid the interest in the previous year, therefore have no interest to offset against rent in the final year), it's buying power will be less. I guess that's a variation on the old saying "A bird in the hand is worth two in the bush".
Kevin.
The only thing the tax-bracket contributes to this equation is how much of a refund you get back against your tax deductible expense. The higher the tax bracket, the more the tax man pays of your tax deductible expense.
But, the tax bracket still balances things out because income incurs less tax and tax deductible expenses produce less of a tax saving. Without doing any numbers, I would suggest the numbers still align, regardless of the tax bracket.
Prepaying your interest one year in advance is simply giving you a bigger tax deduction in one year at the tradeoff of a slight loss every other year. That slight loss is the "alternative use" you could have put that prepaid interest to work doing something else.
But if you were holding property for the long term, the big "refund" or "tax saving" you might make in the first year may well be worth the slight loss you incur every other year.
The buying power of $1 gets progressively smaller every year (remember when you could buy 20cents of chips and 2cent potato cakes, for example, whereas now it's $2.00 and 50 cent potato cakes), so even though you may have to pay back some of that tax in the final year when a property is sold (because you would have already prepaid the interest in the previous year, therefore have no interest to offset against rent in the final year), it's buying power will be less. I guess that's a variation on the old saying "A bird in the hand is worth two in the bush".
Kevin.
