I've been helping a colleague crunch some numbers on the decision whether to buy her PPoR in her name or a trust, as she receives trust distributions which she has to pretty much absorb herself at approx 40%.
Very round numbers at this stage, a $1m property, buying in the trust name and renting at a market rent will save her about $20k per year, compared to buying in her name and paying tax on her trust income.
So, how does she weigh up that $20k saving each year against the loss of the full CGT exemption. Naturally when I asked her what growth she expected in the value of the house, I got the usual "oh it'll double every 7-10 years", but going with a more realistic 5% compound growth, if she sells in 10 years time, she's looking at a capital gain of $629k, with $126k of tax payable, assuming she distributes at 40%.
On these numbers, it's a no brainer, a $20k pa saving is clearly worth more than $126k in 10 years time, more like about $330k, assuming a WACC of 7.5%.
But, when I then modelled 10% price growth, the numbers came out a lot more evenly, with a CGT payment of $319k in 10 years time.
Obviously there are many more considerations than just the CGT exemption, but I found it interesting to model it out…didn't help her decision-making though!
Having said all that, a bird in the hand...particularly if we get a period of stagnating prices. (No I'm not a doomsayer!!!)
Cheers
Jonathon
Very round numbers at this stage, a $1m property, buying in the trust name and renting at a market rent will save her about $20k per year, compared to buying in her name and paying tax on her trust income.
So, how does she weigh up that $20k saving each year against the loss of the full CGT exemption. Naturally when I asked her what growth she expected in the value of the house, I got the usual "oh it'll double every 7-10 years", but going with a more realistic 5% compound growth, if she sells in 10 years time, she's looking at a capital gain of $629k, with $126k of tax payable, assuming she distributes at 40%.
On these numbers, it's a no brainer, a $20k pa saving is clearly worth more than $126k in 10 years time, more like about $330k, assuming a WACC of 7.5%.
But, when I then modelled 10% price growth, the numbers came out a lot more evenly, with a CGT payment of $319k in 10 years time.
Obviously there are many more considerations than just the CGT exemption, but I found it interesting to model it out…didn't help her decision-making though!
Having said all that, a bird in the hand...particularly if we get a period of stagnating prices. (No I'm not a doomsayer!!!)
Cheers
Jonathon