Latest / The Follio Property Podcast / The Truth About Property Tax, Trusts & Negative Gearing in Australia | ft. Nathan Hood

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The Truth About Property Tax, Trusts & Negative Gearing in Australia | ft. Nathan Hood · The Follio Property Podcast

• 0:00
  Lachlan's obviously going to have a million questions for you.
• 0:03
  Can you talk us through those various scenarios where it can be your primary place of residence? If you stay in there for five years and then you move out and buy another primary place of residence, still exempt it from capital gains tax. I can pick which one was my primary place of residence. You can, yes. So where does negative gearing fit? Is it in the portfolio? The negative gearing is 100% reduction of your taxable income. Negative gearing is the best strategy for investors. Do you call bullshit? Bullshit. Do you want to elaborate?
• 0:33
  You're listening to the Folio Property Podcast. I'm Rhys Bettle and I'm here each week, my co-host Lachlan Delahunty, to unpack property strategy and the next steps to start or scale your portfolio. If you're enjoying the podcast, do us a favor, hit like, subscribe, please leave a comment so we can grow the channel and bring you amazing guests like the men in front of us today.
• 0:56
  We're really excited to welcome Nathan Hood, co-founder of Carbon Group, a multiple, multiple I stress, industry award-winning business leader in the finance and accounting space, entrepreneur, advocate, and an advert property investor himself. Welcome, Nathan. Thank you. I reckon you've undersold him too, serial entrepreneur. Thank you.
• 1:16
  I did have cereal in there and I actually removed it. There's not too many accountants with these sort of credentials and probably, I suppose, love and passion for property as well. So I think we've got the right guest in for today's topic, tax. Tax, tax, a very popular topic amongst our audience as well. Yeah.
• 1:37
  It's always interesting how we can kind of spice it up, but I thought we'd kind of kick off on the principal place of residence. Lachlan's obviously going to have a million questions for you. But I guess firstly, Nathan, what is the principal place of residence and how does that exemption work? How does it actually work?
• 1:54
  Yeah, so your principal place of residence is really centered around the home, your family home that you're residing in or you have resided in in the past. So you can only claim the principal place of residence if it is the house that you live in. It has to be in your name or in your spouse's name. Personal name. Personal name. So it can't be trust, can't be company. So it can't be through a separate structure. You can only claim one between your family group. So I can't have one and my partner have one.
• 2:23
  No, so once you are a couple, whether de facto or married, they look at your principal place of residence as one dwelling. Okay. And what happens, I think the myth around it is at five years, at six years, at seven years, how long you can claim it for to have to move into it to start with. What happens if I rent it out? Can you talk us through those various scenarios where it can be your primary place of residence?
• 2:47
  Yeah, so if you buy the property and you move into it day one or the date that you can most practically move in, it becomes your main residence from the beginning. If you stay in there for five years and then you move out and buy another primary place of residence,
• 3:03
  and move into that, you can then make a decision, do I keep the original house as my primary place of residence and rent it out for up to six years? And when I sell that, still exempt it from capital gains tax. So it would be the date you actually move in. So if you're doing a new build, say, construction in Perth, maybe it's taken two years or so, it would actually start from the date you move in, not when the construction started. No, so if you buy a block of land and build on it,
• 3:33
  the quickest possible scenarios. So if it takes six months to get the build start, that's practical what it takes. Then that is a property that you've bought to be your main residence and you've done all the steps in the right speed. And as long as you move into it as soon as you practically can, that can remain your main residence from the date you bought the block. And if you're moving from your main residence to this new property that you've built, and that took two years,
• 4:01
  and then you sold your original main residence, they will allow that overlap to be a reasonable- So you get two years of primary place of residence overlap exemption. If you're building, if you buy- There's a strategy. That was a personal question. I was curious. No, but think about this. In a rising market, I'm sort of in this situation myself at the moment. In a rising market, you've got a primary place of residence that you're living in. You drag construction out, or just through to external factors, construction drags out.
• 4:27
  I don't think you have to work too hard doing that. No, exactly. Then there's two years of tax-free money on both those assets. Correct. Okay. So one thing you said before is you can only pick one, but in this scenario there's an overlap because you're building. But if I'm in that situation where I'm in a home, I've lived in it for three years, I then upgrade. You said you can sort of, can I pick which is my prime place of residence for tax purposes? Yes.
• 4:51
  You can. So you've got kind of a six month window to transition between one house and the next. So if you were genuinely moving to the new house, and it just took a little while, there was a tenant in there, you're waiting for them to go, or you wanted to slowly move all your furniture across, whatever it might be, there's kind of a grace overlap period. But if you rented out the old place.
• 5:10
  and then move to the new one, you can wait until you sell to choose which one over that double period, which one had the best gain or which one's gonna give you the better tax outcome to use that one as your main residence. So it doesn't matter which one I'm living in, I can actually pick based on what's been the best financial uplift to determine which one's gonna be exempt. Correct, so because you lived in both of them from the first date that you owned it,
• 5:40
  then you've got more flexibility. If you moved into it after you rented it out, that flexibility goes away. Okay, hypothetically.
• 5:49
  I hedge my bets. I have a house in Perth and I go and move to Melbourne for six months by living that house, prime place of residence. I then see which market performs better, sell both of them. I can pick which one was my prime place of residence. You can, yes. It's exceptional. And that, I understand people listening, that's tax-free. Really the only environment, would you say, Nathan, it's tax-free gains because there's no other vehicles you can do it.
• 6:16
  Correct. So capital gains in general is a better form of tax than straight income and then tax free is the Hail Mary. It's exceptional. What is the scenario if I buy a property and it's rented from day one, therefore I can't physically move into it because it's rented for six months? Is that straight away deemed as an investment property?
• 6:36
  So if it was only six months and then your intention straight away was to live in it and we feel that it's within a reasonable amount of time that you bought it and then moved in when it became practical, a lot of the times the tax office will view that favourably. But if you bought it and rented it for two years and then moved in, then there's nothing you can do.
• 6:56
  for that first two years, that will always be considered in an investment window. And then when you sell it, it'll apportion the property. If it was exempt for eight years of the 10 and taxable for two, you'll pay 20%. Okay, so that's how it is. For the period it was an investment property, they just portion out over the life cycle of that gain and you pay a percentage of that time that was treated as an investment. Whereas if you lived in it first, they will do the inverse. So you'll be able to value it on the date that you moved out.
• 7:26
  And if that value is more attractive than the apportion test, then you can revalue it when it's stopped being your main residence. Are we talking if you chose to start a lease with some tenants or you bought the property and there's already tenants in there? Sometimes you buy a property that's currently leased. That's a huge thing at the moment because people want to sell it, but there's tenants in there. So the risk is, well, it won't be my prime place of residence. But if you could argue that.
• 7:50
  you know the tax office sees it as a you know within a timely manner then you're going to be exempt from day one so the other scenario there is if you know what is the what does the atoc is a reasonable time to move into your home to be deemed it as your home primary place of residence
• 8:08
  What they say is generally accepted is six months if it's an established residence and two years if you are building and construction yourself. If it's more than that and it was genuinely not your fault, then you can apply to get them to approve it. So if there was an eight-month lease in place when you bought it, you can't kick the tenant out.
• 8:29
  What happens hypothetically, I move into my property that I've just bought, circumstances change, I need to sell, and I lived in it for two or three months. What's the ATO's view on that? Once you've established that as your permanent place of residence, there's no time frame. So if you did move into it, and you, for all intents and purposes, did everything that a regular homeowner would by moving into the property, and then circumstances meant that you did have to sell, that would still be considered your main residence.
• 8:55
  So there's no period of time. It could be as little as a month, hypothetically speaking. Correct. It's more your actions that are considered rather than the timeframes. It's good. It's a really interesting space. Like I said, tax-free dollars in any investment vehicle is almost impossible, and that's where I always preach on this show. Your primary place for residence, in my view, is arguably your most important and best investment. What's your thoughts on that? Yeah, definitely. And people get fixated keeping their original main residence because it's the first property they bought often.
• 9:24
  whereas it can frequently be better option to sell that off, use that capital to deploy on other performing assets rather than kind of being stuck in the one that you've got, purely because you're not losing the tax on the transaction.
• 9:39
  Last question on this because I know we've got a bit to get through because I love all things tax. We can use it to our advantage. It's the most excited I've seen in a while actually. Well, when you can use it to your advantage, right? Pay no tax. We've been this excited about tax time. If that six-year period talked to us about that, everyone's like, I've got to sell it before six years. What happens? Bought a property, moved out three years. I've got six years until what?
• 10:04
  So at the end of the six-year period, so this is six years of the property being rented out, you can move back into it, live there for another period of time, and then the six years resets. And this is to be classed as your primary place of residence? If I didn't, I was overseas and it goes to year seven, that can never be classed as my primary place of residence?
• 10:24
  Once you've exceeded the six years, it stops being your main residence. But that entire period from the date you bought it all the way to the end of the six year exemption after you moved out is all exempt. So if that was 10 years in total and you then have one more year where it's deemed an investment, it's one eleventh of the gain is taxable.
• 10:47
  Okay, so there's no real, because I know people, I need to sell it because I'm coming up to my six years. It's really a myth because you're going to be, it's still going to be treated as a primary place of residence for that period. It's just anything beyond that, you're going to potentially, if there's uplift, pay capital gains. Could you get really technical if you know that the years you held it, there was growth years and then it stagnated? Could I get valuations, respective valuations, to prove those points or is that? You can get valuations at the end of your primary place of residence election period. Yep.
• 11:16
  So if you only did four years of the primary exemption instead of the six, because that was a peak in the market and you've now moved into a different place and you want that to be your primary place, you can revalue it at that point.
• 11:27
  When would you encourage valuations to take place when you've seen huge uplift and you're like, I need to lock in this game? Or when do you normally advise clients to be getting valuations? Yeah, you just want to be aware. So you want to know what the market's doing. You want as much information as you can to make sure that you can make the best decisions with that. There's no silver bullet if you get a valuation at a million bucks.
• 11:49
  and you know you're gonna sell it in a few years time, and that's a strong valuation, and you've also got a separate primary residence, you could use that as a window to change your election. And then if that million goes to a million and 20 by the time you sell, it's only that 20 grand you might be up for as taxable income. And does the ATO, will they need a valuation or can it be an appraisal from an agent? To elect for your capital gains exemption, you'd want that to be a formal valuation.
• 12:17
  Beautiful. Structuring. I think that's one we get a lot of questions about and probably not just from the podcast, but also customers coming to it. I think we could probably unpack a fair bit of this today. Yeah. So I guess, how should you structure your profit investment?
• 12:33
  personal name, company, trust, or another question kind of to go with that is, a lot of people will start in their personal name, and Lachlan loves me saying this, a lot of people start being an accidental landlord where maybe they've moved out of their principal place and turned that into investments, so it's in personal names. At what point should they start looking at?
• 12:52
  company structures or trust structures? Yeah, so the Hail Mary structure is to own all your assets through a trust. So multiple reasons, obviously asset protection. Besides your primary place of residence. Besides your primary place of residence, correct? You're listening.
• 13:08
  So in a trust, you've got the ability to distribute capital gains throughout your family group. You've got the asset protection side of things to make sure it's safe in case anything goes wrong in your personal name. But the downside to trust is that negative gearing benefits are all caught and locked away in that trust. They can't be distributed out to the individuals.
• 13:30
  So for people that are salary and wage earners that can't get other income into these trusts, they're often hamstrung by the chase of negative gearing and the benefit to help compensate and cash flow some of these properties that they just won't otherwise be able to get in the trust. So they do build exactly that. They build property portfolios in their personal names.
• 13:53
  They're typically then combating a challenge between the primary earner and buying it in their name for the negative gearing benefits versus the secondary earner not owning any. But when they do make a capital gain, that's going on top of the primary earner's income, which is then twice as bad, obviously, on the sale of it.
• 14:12
  Whereas if there are avenues, and this could be from- So let's just wind that back for the listeners because what's common sense for you isn't for the consumer. So in that scenario-
• 14:25
  I buy in a trust, I'm weighing up with it, I buy in a trust or in my personal name. If I buy my personal name, I personally, Lachlan Della Honey, get all the negative gearing benefits under that structure, and then when I sell the property, obviously the capital gain event will then get added to my taxable income. If I was to do it in a trust, Lachlan Della Honey, in a family trust where I can distribute to family members, et cetera, I personally can't claim all that negative gearing.
• 14:52
  Correct. It gets locked away in that trust until such a time as that trust itself starts to make a profit. Right. And then you can claim negative gearing. Then you can claim all the losses that it's generated over time. And that only happens at a sale event.
• 15:09
  A sale event or when your rental income exceeds the outlay or depending on- But I can claim all those costs back at the end and say if I sell it and sell it for a $500,000 profit, I lost $150,000 in interest payments through that period, that will come off the capital gain? Yeah, they can eat away. Okay. So it's more the disadvantage of cash flow getting the 12-month, I guess, cash kicker from the government for that negative gearing. I can get that every 12 months rather than at the end of the sale event.
• 15:36
  Correct. So where that changes is where you've got other avenues of revenue or if the property's not fully geared. So if you've got to a position... Yeah, there's not going to be any gearing benefit to you, then a trust makes much more sense. Correct. If you can buy a property...
• 15:53
  at a neutral level where it's not losing any money and it's only got future upside from the income, then you should be considering family trusts as the investment. Commercial property would be a great example of that. Commercial property, exactly right. So you don't have the running costs, so to speak. In a commercial property, you get your straight rent and the tenant typically pays for the majority of costs. And under this structure, through various trusts, would you advise buying every asset in an individual trust?
• 16:19
  to avoid the land tax scenario. I don't know what you can and can't say about that, but obviously it's a state bank, hypothetically, if it's in your personal name and you're buying a trust, your land tax is... Yeah, so typically land tax will group all assets owned by a single entity. So if you've got trust with corporate trustees, so companies acting in that trustee capacity,
• 16:41
  then you'll often see limits to the amount of properties people will put in each individual trust because obviously land tax will ratchet up dramatically. So they will separate those out. That's a huge positive in using trust as a vehicle in comparison to buying everything in your personal name, you're gonna find you're gonna hit a surplus limit where your land tax starts to, you know, ratchet up significantly like you said.
• 17:04
  Correct. And it's more from the asset protection standpoint that if you've got everything in one trust and something does go wrong in that trust, if you do a property development and that collapses, all of your other assets are at risk of that. So it's a great way to separate your assets and your portfolio for protection. Correct.
• 17:20
  What about serviceability? The big thing you always hear is people go down that route to help increase their borrowing capacity from a property perspective. How does that differ from personal name? So the personal names will still guarantor a lot of the loans. Now we'll go through evolutions I guess of banking rules.
• 17:41
  So if we go back maybe 10 years, there was a lot of hype around what they call hybrid trusts, where they tried to get the best of both worlds, where it was a unit trust to allow the negative gearing to sit in your personal name. But there was a discretionary element to the trust to allow the capital gains to stream to different members of the family.
• 18:00
  Unfortunately, banks have now stopped lending to those entities. So if you set one of those up for the creativeness, the banks have now stopped you being able to use those properties to releverage into others. So typically, if you get too creative, the banks will shut it down via government policy and things like that.
• 18:21
  But there are certain banks, and again, throughout changes in the cycles, where banks will allow trust to lend stand-alone. So if the trust can service its debt, they'll often just look at that stand-alone without bringing anything else into it. So if I'm running out of some serviceability in my personal name, but I have a property in a trust, as long as that trust can demonstrate that it can be self-sufficient, they won't factor in my personal situation in lending against that trust.
• 18:50
  only in certain standpoints within the cycles and only certain banks. So you will be very niche into getting that approved, but it is something that would be possible that wouldn't be possible if you had them all in your personal life.
• 19:05
  And they probably change my backgrounds in that non-bank lending space as well. So I'm quite familiar when your risk appetite can change depending on what your back book performance is like as well. So those lenders are going to constantly be in and out of the market. So it's probably, I mean, that's for the people listening. That's a key thing to be open to like a mortgage broker who's got access to all these different lenders as well. And you want a mortgage broker that is creative because they should be part of your team.
• 19:34
  So they're going to help you buy the right assets and build your portfolio because one wrong decision, so one lemon, because of the transaction costs in and out of property, can affect the build of the rest of your portfolio. So you do want them on board every step of the way.
• 19:50
  Yeah, huge, huge piece of the puzzle, having a really good accountant, broker, and someone who's a student in the property space to pull these things together. And they do link. So the tax benefits, depending on the structure that you're in, improves your serviceability with the bank because they factor in things like negative gearing and its impacts on your income. So if you bought it in your spouse's name and they didn't have any taxable income, so they didn't get the negative gearing, it would give you a different borrowing capacity to if it was in your name.
• 20:17
  There you go. So it all sort of ties in. It all links together. And then the last piece of that is trust. It does sound like a fantastic vehicle. When you look at the positive and negatives, there's a huge upside in buying in trust. What about just straight-out companies?
• 20:31
  Companies are starting to get a little bit more attention. So the downside to a company is they don't get the capital gains discount. So you'll be paying tax on 100% of the income. So even though the tax rates now dropped from 30% to 25%, without the discount, it's the same rate that you would pay in your personal name for capital gains tax.
• 20:51
  The only reason people are buying in companies now is because they've got other business income that they've streamed to these what they call bucket companies. And instead of pulling that money out and then using that money to buy property in their own name, they're leaving that money in the company and just buying in there.
• 21:07
  So then they're not paying tax right away. They're not losing part of their deposit in tax. So they're buying power slightly higher. So they might be able to afford a slightly superior property today at a cost of tomorrow's capital gains.
• 21:22
  So that's a bit of a trade-off. And you're pushing down paying the tax essentially. Correct. So it's not an ideal structure, but it has a place. Developments would be a great example. Developments are a different piece because they're taxed at straight revenue rates. So no longer a capital gain discount applies. So all of them are typically done for companies anyway because of the working capital benefit and the flat tax rate.
• 21:47
  So look at that, people at home, where do we want to be taxed as a company or as capital gain? Correct. So what's your purpose of holding the property? What do you think are the most likely outcomes? If we were doing it for tax efficiencies, though, we'd always want to be taxed at a capital gain. We do always want capital gain tax rates. Because even at the highest personal tax rate, you're only paying tax on half. So effective rates of 24%. 24% versus company rates.
• 22:15
  So companies are 25, but then to get the money out of the company, you have to pay your personal tax rate. So it could be anywhere from 35 to 50, or 48. So in all situations, we want to be treated as a capital gain, not as an income.
• 22:32
  Beautiful. I mean, we've touched on this already in the conversation. We're talking through structures, but negative gearing, I think, you know, even people outside the property industry, everyone knows negative gearing. It's in our face every three or four years. It lost the Labor government election. Yeah, exactly. It seems every election it sort of gets brought up and there's people very opinionated on one side or the other. I guess in plain terms, what is negative gearing?
• 22:57
  So, I mean, the simple answer is negative gearing is the ability to claim for the losses that you make in holding and renting out an investment property. So it's the ATO's way of saying you're providing an asset, you bought an asset in order to make a return. It's not yet making a return. The cost of running it is losing you money. So we'll allow you to offset that loss against your other income.
• 23:21
  It's a beautiful advantage, right? It's the government essentially paying you to hold property. Correct. Which is very unique and I can see why it comes with so much stigma but so much noise when it goes to the election because it's arguably favouring those with property, bigger portfolios, arguably slightly in better situations. And it's creating, I guess, the gap between those trying to get into the market and those who are already in the market because essentially incentivising higher income earners to continue to play in the property space.
• 23:51
  It is. And it's... Not that I want to get political. There's two sides of the fence. And the hardest thing to know is what the outcomes would be if it wasn't allowed. So no one goes into business to lose money. So if negative gearing wasn't there and I knew I was going to lose money without any benefit to help me pay for it, would I buy property assets? Yes.
• 24:12
  Would I only do so if they were cheap or paying higher rents? In which case, if they were too cheap, builders wouldn't get to build any properties. If the rents were too high, there wouldn't be any housing available for people to rent. So what would the cause and effect be if there was no negative gearing? We don't know.
• 24:28
  Yeah, and that's it, right? There's a huge problem, housing shortage. Not enough rental properties in the country. There is. If you were to remove that, it takes away a huge incentive, which could lead to- They would address different markets. So all of a sudden, people would only buy commercial property because it's not going to be negatively geared or their returns will be higher quicker. So how do you see, in your world, in the tax world, where this is taken full advantage in terms of building out a portfolio? Where do you typically see it take shape in a portfolio?
• 24:59
  Well, it's really important because you don't want to lose money. So if you're getting a negative gearing benefit, you would prefer it to be through the likes of depreciation and things like that, which we can touch on a little bit further. The dream is to buy assets that are neutral or positively geared as quick as possible because they're going to give you more servicing to buy more assets.
• 25:21
  So where does negative gearing fit within a portfolio? So negative gearing fits where you've already got very high incomes. So you might go through a spike window where your business or your profession is going through a high pay cycle. And you're getting a lot of additional revenue that you might not see coming for the next 10 years. And so instead of buying high income yielding assets, you might buy some development style assets that are more land banked.
• 25:47
  that at the time in the market, we may think are gonna appreciate faster than those other ones, and you can afford to carry the extra expense. So you might buy some of those, you might eventually develop one or two, or you might just simply sell because of the uplift when your servicing drops back down to more normalised levels.
• 26:06
  because you've got no need for the additional income. Where you do have the need for the additional income, the bias has got to be assets that are going to generate good steady yields. So newer properties typically have less maintenance costs. They're more attractive to a tenant because they are newer, so they will pay you a higher rent even if the property itself is inferior. Right.
• 26:29
  Because the problem is we typically drive negative geared strategies because when you look at what appreciates in value, it's a land component of the property, right? So getting higher land value assets typically means, or does mean you have lower improvement value, therefore the rental return's gonna be less but the capital gain in terms of the appreciation is likely to be higher.
• 26:51
  So what does that mean? In summary, it means we buy negatively geared properties because we get greater capital growth. Yes. So that is the offset of that argument, right? And that's exactly right. If you're going through a window where you can afford losing money,
• 27:03
  but you're getting or expecting a larger capital gain out of it because capital gains is only 50% tax and the negative gearing is 100% reduction of your taxable income, you're getting an arbitrage of that outcome, even if it just replaces what it costs you when you do sell it. So obviously we're hoping that it gets more than that. So put that into reality on the live example.
• 27:26
  So if we held a property for five years and it lost us 100 grand over that five years. In interest. In interest and maintenance and running costs and upkeep. And I was at the highest marginal rate, I would have saved 48,000 in tax. So now that 100 grand has really only cost me 52. If I then get 100 grand capital gain when I sell it, hopefully we get a lot more, but if I only got the 100,000, I only pay tax on 50 grand because I get the 50% discount.
• 27:53
  And at the highest marginal rate, that's only 25. So I've made 27 grand in just that arbitrage. There you go. So it's using your tax to your advantage in that? Correct. It's kind of reducing your risks by knowing what levers you can pull to do the asset that you want to buy. I'm kind of reading between the lines there, but it definitely seems more of a benefit than a strategy. It's, yeah, we definitely don't want to go into an asset class that's going to lose us money, but it helps complement getting into the right asset class.
• 28:23
  And it comes down, like I said, this whole podcast is built around how to build out a portfolio. And depending on the scenario, the situation of the client will depend on which strategy we recommend. And often it's a blend, right? Where you're going to have high land value assets complemented with higher cash flow assets to get your diversification, but also to benefit from these tax sort of environments that we've discussed. Yeah, correct. Just to kind of wrap it up as well,
• 28:52
  Maybe it would be good to talk through some of what you can and you can't claim from a property perspective. What's the real difference between capital improvements and maintenance?
• 29:04
  So again, the simple vanilla answer is if you're replacing something that is broken or no longer working as it should have with something exactly the same, but just the newer version, then that's typically considered maintenance and repairs. So my entire kitchen, bathroom, ensuite, floor coverings. So not a kitchen, because that would be a new asset, but if you replaced the carpet with new carpet,
• 29:31
  That's carpet with carpet. Maintenance can be applied. But if you replace carpet with tiles, that would be an improvement.
• 29:38
  and then that becomes... So you can't claim that? You can depreciate it over whatever years they would deem the tiles to be depreciated. If we're going to do a renovation, we want an instant savings on those expenses, so we want them to be maintenance items. So some keys there, I didn't actually realise that. If you have carpet floor, you need to be replacing it with carpet. If the property's marked up and it needs to be painting, is that a maintenance item?
• 30:04
  Yeah, so the exception to all of these is if you buy a property knowing that these items need to be done, automatically they are deemed to be capital because you've bought it cheaper because these needed to be done. But if it's rented out and I'm going to do some works or I go into the property. So what happens with that? So if I go into the property, I have to rent it out first before it can be treated as maintenance.
• 30:26
  Yes. So their statement would be that if you bought it knowing that this is required, that's going to have to be capital. But if you have rented it out- How do they determine that? If I bought the property with a site unseen, I didn't know how to do all this work. What's the definition? Pretty much you have to rent it out.
• 30:44
  Yeah, so you want to be able to buy property that you can rent straight away. If you are buying something that you know needs work, there's always going to be a grey area that you're going to have to navigate. But if you're between tenancies, tenant leaves, you go in there and you're like, these walls need another paint job. Yep, flooring needs to be replaced. Flooring needs to be replaced. We replace it with same that was on there, their maintenance items to bring it back to the standard. But you say a kitchen's not, but what happens if a kitchen bench top's damaged? We have to replace a kitchen bench top.
• 31:11
  If we're just replacing one item because that is damaged, then yes. So the doors break. We need your doors. That's a maintenance item. We need the bench top. Also the dishwasher. Oh, geez. It turns out the tap's broken as well. Look how far...
• 31:23
  If it starts to feel odd, you're probably going too far. That's well put. Lachlan, you can tell this is Lachlan digging into his personal circumstances. Yeah, but everyone's thinking it. So it's important to see what is classed as maintenance and what is capital works because I'm sure people try to push the envelope on this, but it's important to know what...
• 31:43
  what is deemed maintenance. It is, and it's a big item. And on that same topic, there's the depreciation side of things. And a lot of people talk about depreciation. And so there's two sides to depreciating. There's what they call the capital works, which is all the big stuff. So the bricks and mortar, the foundations, the bulk of the house.
• 32:02
  Now that depreciates slowly over 40 years. So you get 2.5% per year. So effectively, anything that's greater than 40 years old no longer has any depreciation left. And this is the structural component? This is the house. So the date the house was built, 40 years later, there is no value. If it's 10 years old, I get 30 years of depreciation in the structural element. Correct. And someone will come in. They'll do an assessment of what it costs to build at the date it was built, so not today's value of build,
• 32:30
  whatever date and what the building costs were, they'll break that up between the two components. So the other component is the fixtures and fittings, so your lights and all the incidental items. They depreciate a lot quicker. So a lot of them might be gone in the first five years. Right, so it's the first five. So that's the whole Mary window. So if you had a new build and you got a depreciation report, those first five years you're going to get a large portion of the build costs
• 32:55
  as a deduction against your rental property. So again, a lot of investors will want to hold them for five years anyway because that window is quite lucrative where you're getting good rents because it's a new build, there's load maintenance because they're a new build, and you're getting really generous depreciation. And when we look at it, like we've done the numbers on the new build, you can get $10,000 to $15,000 depreciation each year for those first five years. It can be quite significant.
• 33:17
  Correct, and especially now, so bill costs have obviously gone up quite substantially, so you'll probably find those 15s are probably pushing more like 25s. Yeah, but noting that, and this is an important caveat, that appreciation, whatever you claim in those years, comes off your capital gain event.
• 33:33
  Correct. It reduces your cost base. So when you do go to sell it, you will pay tax at a capital gains level. But just like we mentioned before, capital gains is far cheaper than straight income tax. So the benefits that you're getting today, you will pay half of them back in the future. But again, if you line up your capital gains event with a window of time where you're not paying high marginal rates because you might have retired or taking a year off, then the capital gains event is at a low income base.
• 34:02
  Beautiful. We're going to have to have another episode on this. So we've got millions of questions. We're going to get Nathan back in for... We will. I think we'll get Nathan back in in the coming months. Just before you leave us, Nathan, we'd like to finish the episode with our core roots, which is a statement that we constantly are getting asked or we see in the comments, and you call out whether you think it's bullshit or not. So the statement reads, negative gearing is the best strategy for investors. Do you call bullshit? Bullshit.
• 34:31
  Do you want to elaborate? Well, kind of like we touched on before, no one wants to lose money in business. I would pay tax and make a profit on renting all my properties out in a heartbeat. But the fact that I'm able to claim a deduction for the losses that they generate because I'm providing rental properties to the market, I think is something that helps investors buy more properties and helps people get in, especially with their first one.
• 34:59
  So it does provide a benefit, but it's definitely not why we're investing. Thanks for listening to the Follow Our Property Podcast.