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Discussion in 'Investing Strategies' started by Triu, 27th Jul, 2007.

  1. Triu

    Triu Well-Known Member

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    WA
    :) I have a question I think I know the answer but want to confirm my thinking.

    When you invest in property you can draw down on the equity for private borrowings if you want is that true. So you don’t pay tax on borrowed money.


    But if you invest in shares or managed funds how do you get out the extra equity without having to pay tax on money received? Do you have to trade or buy and sell to realise profits now.

    Also how much money would you guys have in the bank for living expenses would it be 10% of your net worth and the rest invested?

    Thanks for any advice
     
  2. MJK

    MJK Well-Known Member

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  3. MJK

    MJK Well-Known Member

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    Bear in mind that the use the borrowings are put to will determine whether you can claim a tax deduction.

    MJK:)
     
  4. Triu

    Triu Well-Known Member

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    Thanks MJK i understand that you pay tax on your income from shares, managed funds etc. My question is why then invest in shares and managed funds for growth and income if you are paying tax.

    Would it not be better to invest in property and use the borrowed equity for private expenses in the future without having to pay tax.

    How do the Peter spanns take out there money from shares and managed funds if they are investing for growth etc. Am i missing a point of the investment triangle?
     
  5. crc_error

    crc_error The Rule of 72

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    you can draw down equity from shares via a margin loan..

    a margin loan is priced daily, no need for expensive bank fees to draw up new loans, income assessments, valuations etc..
     
  6. JamesGG

    JamesGG Member

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    Hiya,

    Triu, let's look at it another way; what's to say that property is the only investment that you can leverage against...?

    Cheers

    James.
     
  7. Triu

    Triu Well-Known Member

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    Great thanks for the info guys. My only concern would be that if you draw down from the margin loan your interest rate is higher than the standard home loan.

    But anyway thanks again for the information still learning. I think they should teach this stuff at University i know i would pay for the information to learn.

    Have spent a lot of money so far how the system works it has been a great ride though and still learning and loving it.
     
  8. MJK

    MJK Well-Known Member

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    1. It may be a good strategy to stay in property and draw equity for personal use from a tax position.
    Some people are very uncomfortable with the idea of living of capital growth with spiralling debt though.
    Investing in managed funds will usually provide immediate cashflow if it is required now and if it is used for personal expenses at least you are spending income without creating debt on debt.
    Yes you will pay more tax but you will still be in front.

    2. As crc_error said you can draw down on your margin loan as your LVR drops by capital growth.

    My personal approach is to capitalise interest in the margin loan and have the distributions/income payed to me to spend as I wish. The growth component of the managed fund portfolio is growing fast enough to maintain a static LVR even with capitalised interest. My distributions are then added to my taxable income but are partially offset by my property gearing.

    Your idea may be more tax affective though. Ultimately I'm in it for a profit wherever I can get it. Tax is a secondary issue for me.

    MJK:D
     
  9. Saskatoon

    Saskatoon Well-Known Member

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    Hi Triu,
    reading your post it seems to me that you are mixing up capital gains and tax deductibility on borrowings. If you buy any asset (property or shares) and it has increased in value when you dispose of it, then you are liable for Capital Gains Tax (with the exception of your PPOR).
    If you have borrowed to buy the asset then the loan interest is tax-deductible (again with the exception of your PPOR). By taking equity out of your investments for private purposes the interest on that portion of borrowings is no longer tax-deductible.
    Regarding your comment about learning I found that Bruce Davis' book 'How to Build Riches' gives clear explanations, although the edition I have is now out-of-date concerning superannuation. Other forumites might have other sources. Keep reading!!
    Terry
     
  10. lorrimer

    lorrimer Well-Known Member

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    I'm using the same strategy as yourself MJK. However the funds that I chose for providing capital growth haven't been doing their job, even before the recent big dip. My LVR has therefore shot up recently after the big Navra distribution and pre-paying capitalised interest on my margin loan to reduce this years tax bill.
    Would you mind telling me what funds you are using for capital growth?
    Thanks
     
  11. bundy1964

    bundy1964 Well-Known Member

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    I would think you could claim the interest you are paying on the shares too.
     
  12. MJK

    MJK Well-Known Member

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    I suppose because I have been doing this for a couple of years it has been relatively easy with most managed funds doing well. Mind you last month and this month I have'nt had any capital growth either.

    My stellar funds have been,

    UBS property Securities fund ( Aus LPT )
    BT W/S Imputation Fund ( Aus Shares)
    Prime Value growth Fund class B ( Aus Shares)

    Note: I will exit these funds if the stop performing

    Right now I like Navra for the current climate and if I was starting out I may consider reinvesting distributions instead of growth funds until we get a clearer idea of where the market is heading.

    Also I have sold two properties over the last 2 years so I have some of my own cash in the mix which means I earn real dollars without interest burden.

    Regards,

    MJK:D
     
  13. MJK

    MJK Well-Known Member

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    Absolutely!:D

    MJK
     
  14. lorrimer

    lorrimer Well-Known Member

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    I'm also in BT Imputation, which I have been quite happy with.
    My really poor performers have been in properterty securities, namely Australian Unity and Macquarie Property Income.
    I really don't know whether all the bad news has already been factored in to these funds, or if they have much further to fall.
    I'm going to be buying some more Navra wholesale on Monday, and will be keeping some cash in reserve to purchase even more if the price drops further.
     
  15. MJK

    MJK Well-Known Member

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    I decided in June to take all my end of financial year income distributions, from the "growth funds", in cash rather than reinvest. I'm glad I did. I was able to take $ 45k of the table before recent falls. I aslo redeemed 46K worth of LPT in June also. So that was good.:)
    I'm quietly confident with my 100k new purchase of Navra funds, but would have preferred to buy it at $1.07 rather than $1.13...but of course none of us is immune are they.:eek:

    At the moment I will continue to not reinvest distributions as a way of reducing exposure by debt reduction.

    Note: I use the term growth funds loosly refering to my funds that are allocated to margin control regardless of them being an income fund, share fund or LPT.:rolleyes:

    MJK:D