How property investment can reduce your income tax
When planning finances for property investment, many would-be investors focus only on house prices and rental rates to estimate their returns. However, there are a range of tax deductions and calculations that means owning an investment property could be more affordable and better for your bank balance.
This page offers a complete guide to tax and property investment.
loans and interest
costs of managing the property
council and (some) utility bills
maintenance and repair costs
It’s important to keep all of your expense receipts and every document relating to money spent on your investment property so you can submit them with your tax return when the time comes.
Depreciation allows investors to claim tax deductions for fixtures and fittings as they get older and wear out. This can include items within the building such as ovens, dishwashers, carpet and blinds, as well as the building itself such as concrete and brickwork.
Even though your property may go up in value on the market, you can still claim depreciation costs against your income.
Until 2017, Australian investors could claim depreciation on new and used homes. But since then, depreciation can only be claimed on assets in new homes or new assets installed in an older home. This means that generally, brand new off-the-plan homes will have far more scope for claiming depreciation when it comes to tax time.
Positive and negative gearing
Positive and negative gearing are often used terms in property investment. It’s important to understand the benefits and drawbacks of each option when thinking about making your investment.
- Positive gearing is when you buy an investment property and the money you spend on your investment (e.g. mortgage payments, maintenance costs and management fees) is less than the money you receive from your tenants each month, giving you a profit.
- Negative gearing is the opposite – the costs of running the investment property are more than the money you get each month in rent, therefore you’re paying an amount of money each month to maintain your property.
It might seem that negative gearing is a bad thing, but there are plenty of upsides to negative gearing when it comes to your tax returns. Rather than paying extra tax on the income you receive from rent, if your property is negatively geared the difference represents a loss and can be offset against other income – like your wages – to reduce your tax bill.
Using an example of a property investor in full time employment:
Annual salary = $95,000
Rental income per year = $23,000
Total annual income = $118,000
The additional rental revenue would raise the total annual income, meaning that much more money is paid in tax. $84,380. Now let’s take into consideration the running costs for the property and the depreciation claims that can be made:
Annual cost of property (includes loans, fees and insurance) = $22,000
Depreciation claim = $11,000
Total claimable expenses = $33,000
Your new taxable income is now $85,000
This brings the total annual income into a lower tax bracket overall, and because tax has already been paid on the $95,000 salary ($10,000 more than the real taxable income) this person can expect a tax return of $3750 for the year. That’s nearly $75 per week in the pocket to spend on family, fun, or savings.
What’s more, if the investment property is increasing in value (which it should be with the right market advice and insights) there will be significant profits when the property is sold. Generally, the amount a property increases each year will far outweigh any profits from rental income.
Capital Gains Tax
Capital Gains Tax applies to any profits you’ve made on your property when you sell it. It takes into consideration your ‘cost base’ – the original property price, plus any costs associated with the purchase and sale of the property for example stamp duty, broker fees, loan application fees and legal expenses.
If you’ve owned your property for more than 12 months, you can apply for a 50% discount on your capital gains tax, which can amount to significant savings. If you have other assets that you’ve made a loss on, you can offset the figures to work out a net capital gain or loss.
Calculating the rate for Capital Gains Tax can be complicated, as there are a range of factors that could affect the amount you pay. We suggest using the services of a professional accountant if you’re considering selling your property to check any savings you could make.
The Reventon formula for tax and property investment
One of our experts visits you for a casual chat to understand your current financial position and future goals.
We conduct research of the market and present you with a personalised plan to suit your circumstances.
We help you find a property, negotiate funds, and work with agents to secure your purchase.
We find and screen your tenants, and we conduct ongoing inspections of the property for your peace of mind.
Your personal wealth is secured and grown through sustainable investments, risk insurance, and personal tax reduction.
We build you wealth, we protect your wealth, we help you create a legacy.
Get personalised advice for free
If you are thinking about property investment and how it can help you reduce tax, it’s recommended that you speak to a professional about your options. Reventon offers financial planning, accounting and property investment services, so you can benefit from expert advice and across the whole process.
Remove the stress from tax and property investment with Reventon.