3 Tax Advantages for Property Investors
One of the main benefits of buying an investment property is the tax advantages available. The Australian Government knows the importance that property investors play in the economy and housing markets, and therefore rewards them with various tax advantages. But do you know what exactly you can claim?
By knowing your legitimate entitlements, you can claw back thousands of hard earned dollars through owning an investment property. However, you must keep in mind that you should not buy a property just to reap the tax benefits, but it does play an important role and should not be overlooked.
When you own one of more investment properties that are generating you taxable income, there are various costs that can be claimed for earning that income including rental expenses and interest deductions.
1) Rental Expenses
When you rent out your property you are able to claim a percentage of the expenses for the time period that the property is rented. Such expenses include:
Council rates and water charges
Electricity and gas (not paid by the tenant)
Building, contents and public liability insurance
Property agents’ fees and commissions
Property advertising costs
Repairs and maintenance
Travel costs to inspect or maintain property
Pest control costs
2) Other Expenses
You are also able to claim on other costs such as:
The borrowing costs (e.g. loan set up fees, stamp duty, mortgage insurance)
Lawyer’s search fees
3) Interest Deductions
If you are like many investors, you will tend to borrow against your own home to raise the deposit for further investments. As your home is not an income-producing asset, the interest expense is deductible for income tax purposes if this money is used to purchase an investment that will produce an income.
The interest will be deducted from your salary for tax purposes meaning you will be reducing the amount of tax that you would have otherwise had to pay on your income.
Residential properties built after July 17 1985 that are owned by an investor for rental purposes are allowed to claim a building depreciation allowance of 2.5 per cent per annum of the original construction cost for 40 years. This can be offset against other income on your tax return.
On new builds you can claim depreciation on internal fixtures and fittings. Some examples include:
Air Conditioning system
Hot water system
Some of these items have a longer life than others whilst several may be written off after just a few years. This could save you thousands every year so it is worth doing.
Having a Depreciation Schedule drawn up from a good quantity surveyor will help list all the items you can claim, and you should be able to recoup their fee within the first tax return.
Many property investors turn to negatively geared investments. A negative geared property simply means that your expenses exceed your income and you are making a loss (have a negative cash flow). The reason for this is because a negatively geared property can be offset against your income, thereby reducing tax that you would be paying on that income.
However, you should proceed with caution with negative gearing as it means producing a loss. You will need to be able to afford the extra payments at the present time as you will only recoup the money if the property value increases over time, which every property you own should do.
There are many tax advantages to utilise so it is worth seeking professional advice from a property accountant that can work out exactly what you can and cannot claim. It is also worth thinking about whose name the property is in.
Disclaimer: The information provided is of a general nature and should not be relied upon without first obtaining advice from a qualified professional person. This article is for general information.
If you are buying an investment property with your partner and one of you earns a significantly higher income than the other, for tax reasons it would be better for the higher income earner to have this property in their name as they can claim back more tax.