Money Matters: Forget about skiing - settle that debt

By MARY HOLM

Body1: Q. I am a newly graduated doctor, working as a first-year house surgeon with an annual salary of $56,000.

Having lived six years as a student, I have managed to accumulate some debt: credit card $2900, bank $10,000 at 7.9 per cent interest, private medical society $28,000 at 7.9 per cent, Government student loan $63,000 at 7 per cent.

Those ski trips are suddenly looking like less of a good idea.

I realise that the credit card debt should be first to go. The bank loan has been automatically set up to be paid off over two years, and the medical society takes $500 a month, while the Government gets 10c in every dollar that I earn for the student loan.

Most people have told me that "as much as possible as fast as possible" is the best way to go in student debt - that is, pay it off in Australian or English currency.

Is there another way? Could I perhaps incorporate this debt into a house mortgage and have my flatmates help pay it off?


A nice try. But I don't think the mortgage idea will work.

More on that in a minute. Firstly, let's deal with all the people who will throw up their hands in horror when they read that you've run up debts of more than $100,000.

I'm not saying that it's fine and dandy. But quite a few people your age have mortgages that are bigger than that. And your investment - in medical education - could prove to be better than their investments in houses.

Your starting pay is already way above the national average wage. Before too long, you could well be earning enough that your debt looks pretty modest.

Still, you don't know what lies around the corner. The advice to get rid of the debt as quickly as possible is sound.

I presume that your comment about Australian or English currency means you should go to one of those countries and earn more than you can here. Maybe. But I don't think that alone should drive a decision on what country to live in. Go where you'll be happiest.

Before you move anywhere, though, do pay off the credit card debt as fast as possible. And don't use it any more if you can't pay it in full every month. Even when that debt is gone, your other loans are still costing you more than $7400 a year in interest, at their current levels.

Here's what I would do. Start by attacking the highest interest debt - while, of course, still paying the required minimums off the others.

The automatic payments on the bank loan are a good idea.

But couldn't you raise the payments so you get rid of it in one year, or perhaps even less? That might seem harsh at first. But many people get by on much lower pay than yours. Once that loan is gone, transfer the automatic payments to the medical society, and later the student loan.

I'm guessing that your idea about getting a mortgage comes from advice given to home owners who have high-interest debt. It often makes sense for them to pay off that debt by adding to their mortgage, with its lower interest rate.

You've probably also heard about people who prosper by buying a house and taking in flatmates. With the right house in the right place and the right flatmates, they might receive more in rent than their mortgage payments.

Obviously, that would be a great situation for you - if you can cope with the idea of taking on a whole lot more debt.

Trouble is, I very much doubt if you would qualify for a mortgage. You've already got big debts, and apparently no deposit for a house. (If you do have savings that could be used as a deposit, you should probably be using that money to make payment off your loans.)

In any case, mortgage interest rates are rising to higher levels than the interest you're currently paying, except on your credit card. So the plan makes less sense for you than for many people.

If you're prepared to live with flatmates, I suggest you rent a place with others, to keep your costs down - if you're not doing that already. Any savings you can make will help you hack back the debt.

While we're at it, you're right about the ski trips. Unless you really want to ski so much that you're prepared to give up other treats, you might be wise to take up tramping or camping instead.

Q. I'm writing about a recent column in which you discuss depreciation on a rental property.

Firstly, you imply that claiming depreciation on a rental property is optional, yet last year my lawyer's accountant advised me that new rules now made it mandatory to claim such depreciation. Could you kindly advise if the rules have changed.

Or, if depreciation has been claimed for several years, can I opt to not claim it in the future?

Secondly, when clawback action is taken, do they claw back the actual amount claimed for depreciation, or do they assess the clawback (at say 33 per cent) on the accumulated depreciation?


A. OK, OK. Depreciation is one of those topics - like annuities, rest home subsidies and British pensions - that don't die.

After I've dealt with the issue in one column, I get lots more letters on it, until everyone gets bored witless. But enough of you have written about whether depreciation is optional that I'd better tackle it.

The deal is this, according to Inland Revenue: When you first start renting out a property, you can "elect" not to claim depreciation ever. But once you've started claiming it, you can't stop.

It sounds as if your lawyer's accountant is out of date, or there has been a misunderstanding.

Yes, the rules have changed, but in the opposite direction. Before September 1997 it was compulsory to deduct depreciation. I suggest she/he gets a copy of the June 1998 version of IR 264, Inland Revenues booklet on rental income. You might want to get one too - by phoning 0800 257 773. Have your IRD number handy and select "other stationery items" when that's given as an option.

Or you can go to the IRD's web site, www.ird.govt.nz. Click on publications, then "general information," and scroll to "rental income."

Let's turn to your second question, on the clawback. If you sell a rental property for more than you paid for it - after subtracting from your sale price costs such as commission and advertising - add all the depreciation you've claimed over the years to your taxable income on your tax return.

That means that if you're in the 33 per cent tax bracket, you'll pay tax of 33 per cent of your total depreciation. Similarly for the other brackets.

If you sell the property for less than what you paid, calculate your adjusted tax value, which is your purchase price less depreciation.

If the sale price (minus selling costs) is larger than that, include the difference in your taxable income. If not, there is no clawback of depreciation. That's because the property did actually depreciate by the amount claimed, or more.

(These rules apply to buildings only. There are different rules for other assets.)

* If you have a question about money, send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.