The idea of an investment is to build wealth and to meet financial goals. Accordingly, when buying property always keep returns in mind. Also, consider the tax advantages that owning property gives you. Let’s consider these now.
A vast range of expenses that relate to your investment property are tax deductible. Thus, it is important to keep sound records and all receipts. However, just remember that you can only claim these if the property is tenanted or available for rent.
An accountant or tax adviser gives you the best indication of all deductions. Although, the general subtractions are straightforward.
What can I deduct?
- Tenant advertising costs – paper, online and billboard.
- Property management fees – real estate agent or self-managed costs.
- Any bank charges – loan interest and any bank fees.
- Council rates – annual local government costs.
- Land tax – charged when you own over a specified value in land.
- Strata fees – grounds maintenance and building insurance.
- Depreciation of fixtures and fittings – dishwasher, fridge, hot water service,
- Repairs and maintenance – gardening, paint, plumbing and fixing wear and tear.
- Insurance – building and landlord.
- Stationery – receipt books, pens, printing and paper.
- Bookkeeping and accounting – record keeping and taxes.
- Legal fees – conveyancer at the time of purchase.
- Utilities – water, gas and electricity installation, along with ongoing sewer fees.
While this is an extensive list of tax deductible items, there may be more. Therefore, always consult your accountant before submitting information.
Negative gearing is a government incentive that keeps rental costs lower and housing more affordable. So, how does it work? Well, when an investor buys a property they will incur expenses – loan interest, council fees, etc. – and collected rent. As soon as the cost of owning the property becomes higher than the rental income collected, this is negative gearing.
For example, let’s say you have an income of $50,000 a year, but your property expenses are $15,000 yearly. Consequently, this means that your taxable income is $35,000. So, you’ll incur tax on this amount.
How does negative gearing benefit me?
- Reduces your tax.
- Rental property becomes more affordable.
- Encourages you to build a portfolio.
What are the risks for me?
- You’ll have to cover some property expenses.
- Some payments, such as paying the loan principal are not tax deductible.
- You need good money management skills.
Not all investment properties are negative geared. Some rental properties collect more rent than ownership costs making them positively geared. Once this occurs, the profit made on the property annually becomes a part of your taxable income.
When you sell your investment property, if you make a profit, then you would’ve made a capital gain. The gain made is taxable. Therefore, the profit made adds to your regular income in the year of the sale.
How is capital gains tax calculated?
- The sale price of your property.
- Less the purchase price and any buying, ownership and selling costs.
- If ownership is longer than 12-months, you’re entitled to a 50% gains discount.
- Your annual income in the year of sale.
Let’s look at an example.
You buy an investment property for $190,000 in 2000. In 2017, you sell this property for $490,000, and your current taxable income is $50,000. The cost to purchase the property including stamp duty, tax advice and capital improvements was $47,000. Ownership costs were $126,468 and the costs of selling $23,000. Based on this, the capital gain made was $103,432. Subsequently, the tax payable under the new Capital Gains Regime of a marginal tax rate x half the capital gain is $24,582.