Tax and Investment Property Australia

Making the most of your investment property at tax time

As the end of the financial year approaches, it is important to understand the full range of benefits you can derive from owning an investment property.

There are a number of deductions and other benefits associated with property investment, and so it pays to ensure that you understand them and are able to take full advantage of the opportunities they offer.

Is positive or negative gearing right for me?

Gearing is the term applied to lending that is used to buy property, and most investment properties are either positively geared or negatively geared.

When you are buying an investment property, your individual circumstances and financial goals will go some way to determining whether positive or negative gearing is the right investment strategy for you.

What is positive gearing?

A positively geared property investment is one where the rental income derived from the property is greater than the costs associated with owning and maintaining it, e.g., mortgage repayments, upkeep costs, rates and other charges, etc.

A property that is positively geared will essentially result in a net profit each month, and so is producing regular income that must be accounted for in your tax return.

What is negative gearing?

An investment property that is negatively geared will produce rental income that is less than the monthly ownership costs, i.e., the property costs you money each month.

However, these losses, along with depreciation, can then be offset against your other taxable income, effectively reducing the amount of tax you are required to pay at the end of the financial year. Part of the strategy behind buying a negatively geared investment property is that any losses you make in the short term will in time be offset by increases in the property’s value.

Other ways to reduce the amount of tax you pay on an investment property

There are a number of other ways in which you can reduce the tax you are required to pay as a result of owning an investment property.

How depreciation can reduce your tax burden

Depreciation takes into account the way in which the fixtures and fittings in a property will either deteriorate or cease to function properly over time. The cost of any of these features or appliances that are required to be replaced while the property is being rented out are tax deductible.

Repairs and maintenance work required to ensure the property is habitable can also be claimed as a tax deduction. Likewise, the cost of any renovations may also be able to be claimed, albeit not in full in the year you pay for the work to be done.

In addition, if your property was built after 1987, you may be able to claim a tax deduction on the depreciation cost of the building.

Loan interest on an investment property can be a significant tax deduction

Any interest paid on a loan taken out to buy an investment property can be claimed as a tax deduction. However, this only applies to the part of the loan used for the purchase of the property — it does not apply to any part of the loan used for personal purposes.

Costs associated with finding tenants

You can also claim any expenses you incur when you are looking for tenants for your investment property.

For instance, this includes any advertising costs or any agent fees incurred, as well as the legal expenses associated with drawing up tenancy agreements, etc.

Ownership costs that can be offset against your income

As the owner of an investment property, you will inevitably incur a variety of costs, and many of these can be used as deductions to reduce your tax bill.

For instance, council rates and utility bills (provided you and not the tenants are paying them), can be claimed as a deduction, as can property insurance and land tax. Body Corporate Fees can also be claimed as a tax deduction (provided you are paying them), along with bank charges and accounting costs.

In addition, the cost of pest control, cleaning, garden maintenance and maintenance of appliances can also be offset against your taxable income.

What deductions can’t be claimed on my investment property?

Just as it is important to know what can be claimed against tax, any owner of an investment property needs to know what isn’t considered an eligible deduction.

For instance, you can’t claim deductions on the principal of your loan, or expenses incurred during the purchase or sale of the investment property (including stamp duty, solicitor and conveyances fees).

You are also unable to claim any expenses incurred during the use of your investment property for personal reasons, including any travel expenses associated with carrying out any inspections of the property.

Power of Property helps you make the most of your investment property in Australia

As experienced property strategists, we understand the ins and outs of property investment in Australia, including how to ensure that your investment is as tax efficient as possible and is helping you to meet your investment goals.

We work with a highly qualified team of specialists, including accountants, all of whom are experts in their field, to ensure that you always get the best possible professional advice so that you can invest in property with confidence.

To find out more about how to ensure you get the best possible value from your property investment, call Michael Lawton on 0407 785 560 or Danielle Charlton on 0411 268 795, or book an online property strategy session today.