Reducing tax on rental income

[Ace in the Hole]

Hi Guys,

Any ideas on what a person in this situation could do (made up situation):

Married with 2 young kids.
Earning 300k in positive cashflow from their properties.
Do not work and has no business or other income.
Owns PPOR.
Current properties at 50% LVR.

Assuming they are not looking to acquire any more assets in short term, are there any strategies which could reduce tax on rental income?

Anything they should have done/prepared before reaching this level to avoid paying high tax in this situation?

The way I see it, if you get to this level, you can't just stop and do nothing, unless physically/medically incapable, but this is just a theoretical question.

 

[Lofty]

Hi Ace

If all properties had been bought in a Discretionary Family Trust all the income could be dispersed to the 4 members of the family up to the point where it becomes a better idea to distribute the income to a beneficury company, with its 30% tax rate.

There are of course many questions about using such a Trust in the early years of building such a portfolio and these would need to be taken into account, as well as the "end game" scenario you mentioned.

Cheers, Paul

 

[Blitzkrieg]

Hi Guys,

Any ideas on what a person in this situation could do (made up situation):

Married with 2 young kids.
Earning 300k in positive cashflow from their properties.
Do not work and has no business or other income.
Owns PPOR.
Current properties at 50% LVR.

Assuming they are not looking to acquire any more assets in short term, are there any strategies which could reduce tax on rental income?

Anything they should have done/prepared before reaching this level to avoid paying high tax in this situation?

The way I see it, if you get to this level, you can't just stop and do nothing, unless physically/medically incapable, but this is just a theoretical question.

Wow! JACKPOT!

If I was earning 300K profit per year...... I wouldn't be too worried about paying tax - still reDONKulous amounts of money left afterwards..... And why would you want or need to buy more assets when everything is going swimmingly.

Depreciation wouldn't make much of a dent.... Money laundering in offshore accounts Glenn Wheatley style would be my only suggestion? Or move official address to Cayman Islands?

Sounds like it all went well. How's his (made up) golf handicap?

 

[Hillview]

Distributing money to bucket company

Hi Guys,

Pretty good problem to have really. Just be wary that if you are operating from disc trust then distributing to a bucket company and not actually paying the money can be an issue from the ATO's point of view. They are right on this at the moment.

There could be a number of ways to reduce, but it would really depend on your situation. Would recommend seeing your local accountant.

Mike

 

[Terryw]

If your properties are held in personal names then there is not much you can do. You can still keep on claiming all the usual things such as rates, depreciation, interest etc.

If you have that many properties it may be wise to look at doing your RE licence and then set up a rental management company/trust and charge yourself 10% to manage them. This will help divert some money into the trust where it can be more effectively distributed. Maybe even your own handman business could help out too.

 

[Rolf Latham]

Enjoy the contribution to society



ta
rolf

 

[Hillview]

SUper??

If they are not earning work income are they not open to using super as a deduction??

 

[kathryn d]

Hi Guys,

Any ideas on what a person in this situation could do (made up situation):

Married with 2 young kids.
Earning 300k in positive cashflow from their properties.
Do not work and has no business or other income.
Owns PPOR.
Current properties at 50% LVR.

Assuming they are not looking to acquire any more assets in short term, are there any strategies which could reduce tax on rental income?

Anything they should have done/prepared before reaching this level to avoid paying high tax in this situation?

The way I see it, if you get to this level, you can't just stop and do nothing, unless physically/medically incapable, but this is just a theoretical question.

This is actually an interesting question.
I really don't know the answer, but we will be in this situation in about 15 years.The last thing I want to do is pay income tax. If I had to answer this question now, it would be buy more properties CF- . Even though in Canada we are not permitted to have a property CF- for any long length of time.

 

[Mark Xpnsit]

Its interesting that most people don't make use of all the simple deductions and allowances available to their with their IP. Often people looks for the large savings and things like trusts, depreciation etc.

However making sure you claim all your simple tax deductions for home office use, travel, equipment etc can make a real difference to reducing your profit and therefore tax liability on your IP assets.

 

[jaycee]

Its interesting that most people don't make use of all the simple deductions and allowances available to their with their IP. Often people looks for the large savings and things like trusts, depreciation etc.

However making sure you claim all your simple tax deductions for home office use, travel, equipment etc can make a real difference to reducing your profit and therefore tax liability on your IP assets.

Mark, in this case it assumes all those things are claimed and the person has $300k left over - what woudl you do ?

what would you do ?

 

[dan c]

Contribute the maximum allowable to superannuation, $25k for those under 50, or $50k for the over 50's.

 

[bene313]

Hi Ace

If all properties had been bought in a Discretionary Family Trust all the income could be dispersed to the 4 members of the family up to the point where it becomes a better idea to distribute the income to a beneficury company, with its 30% tax rate.

It's better to be held in a discretionary trust, but really if the properties are currently held jointly, the tax difference would be minimal. The income to the adult individuals would be 3k less in the trust situation. This assumes there are no more than 2 adults to distribute to (eg. grandparents etc).

With the new legislation it would really not be worth using a corp. beneficiary with this level of income.

Possibly super contributions would be a good idea depending on age and circumstance.

 

[Ms Jade]

If your properties are held in personal names then there is not much you can do. You can still keep on claiming all the usual things such as rates, depreciation, interest etc.

If you have that many properties it may be wise to look at doing your RE licence and then set up a rental management company/trust and charge yourself 10% to manage them. This will help divert some money into the trust where it can be more effectively distributed. Maybe even your own handman business could help out too.

Would you really have to get a RE licence to manage them yourself? i would think at this level that they would be carrying on a rental business anyway. Couldn't they just use an ABN and claim all management expenses, car, phone etc like any other partnership?

 

[Indifference]

Anything they should have done/prepared before reaching this level to avoid paying high tax in this situation?

The way I see it, if you get to this level, you can't just stop and do nothing, unless physically/medically incapable, but this is just a theoretical question.

Well, structure of the portfolio would be crucial. If all the income was liable to income tax, you would fork out $108550 versus $90k for the company rate. If you reduce the taxable income to about $180k, I don't believe it really matters from a tax perspective as both come to about $54k at that point.

So, this is a taxable income question, rather than a pure cashflow question, hence, one needs to consider how to reduce taxable income, which is different from reducing cashflow (which should actually have the opposite affect and increase cashflow). I.e. Let's ignore the -ve cashflow investments option.....

So, breaking the 300k down.... What is it used for? Ok, you own your home but you still have many other expenses that drain upon that $300k.... like, utilities, home services, lifestyle costs, car(s), phones, travel etc... If many of these expenses can be turned into a tax deduction, then alot of the daily drain upon the passive income stream can be tax offset at 45c in the dollar, because we are clearly in the top bracket. If you have your affairs structured as a "business" instead of purely as personal wealth, then you can claim much of your necessary expenditure as a tax deduction. Think in these terms, and you may start to realise the difference between the independently wealthy and the rich

Cashflow management requires a business mindset, not a personal investor mindset. $300k as taxable income is not $300k passive income.... it is more like $200k because your lack of financial intelligence is costing you $100k a year. I know it sounds so "Kiyosaki", but it's true....

 

[kathryn d]

Where we have our IPs in Nova Scotia, there is a landlord who started pretty similar to us. He now has 500+units. I mentioned this to someone once in our town who knows him personally. He stated he can't afford to stop building.That made me stop and think..why?
Starting out there are always lots of deductions, but this LL had started to use up all deductions on most and the income tax would be killing him.
He is now adding 100+ units every year.
Our lawyer keeps insisting we incorporate, to lower our taxes.
At the moment we don't have to pay any taxes, but the time will come.

 

[Simon]

That person should be engaging professionals to do everything legal to maximise their income.

 

[Terryw]

Would you really have to get a RE licence to manage them yourself? i would think at this level that they would be carrying on a rental business anyway. Couldn't they just use an ABN and claim all management expenses, car, phone etc like any other partnership?

Hi Ms Jade

I haven't looked into this, but suspect that you could manage your own properties without a licence, but not someone else's. So if you need to use a trust, then you may need the trustee of the trust to have a licence.

 

[Mry]

What Simon said - See a professional. You need someone that knows where you are, what you want and then who can decide where you want to go. Without that knowledge, any advice we can give here will be a stab in the dark really.

One of my favorite sayings is "Tax problems are the best problems in the world". You could devote further funds towards acquiring new properties (hello land tax) or diversify your investment portfolio, the options are endless.

 

[tdh78au]

Charity donations!

 

[Simon]

Would you really have to get a RE licence to manage them yourself? i would think at this level that they would be carrying on a rental business anyway. Couldn't they just use an ABN and claim all management expenses, car, phone etc like any other partnership?

I manage mine myself.

All these deductions just are added to the costs of running it along with the normal IP deductions.

My Tax lady works it out for me.

You don't need any license or qualifications to self manage your own properties.