Property investment is one of the most accessible ways to build wealth within Australia – but there’s a catch. Massive stamp duty costs and other property levy’s can hamper the growth of your portfolio and your bank account. With this in mind, it makes sense for you to educate yourself on all available tax tips. This way you can milk your property for all its worth and generate thousands of dollars annually using tax saving strategies.
There’s a plethora of items and costs that are tax deductible which you may or may not be aware of. And even though it may be more appealing to look at only the larger items for tax deductions, it’s often the little things that tend to add up. The best bet is to cast out a wide net to see what deductions are possible instead of just shooting for large ticket items. Read on to find out more tax tips on deductible items relating to investment properties.
The terms “negative and positive gearing” are bandied around a lot in the media and between more established investors. What they are exactly however may elude those just new to the property investment racket. With that in mind, here’s a breakdown of the definitions of both.
Negative Gearing: Negative gearing is when the gross rental income of your property is less than the total costs involved with owing the property (mortgage repayments, strata fees, maintenance costs, etc.). A property that’s negatively geared may have you out of pocket to begin with, but is anticipated to grow over time and offset any initial losses. A deficit on an investment property is determined by subtracting the total amount of monetary loss from your annual taxable income, meaning you’ll be taxed at a lower overall rate.
Positive Gearing: Positive gearing occurs when the total rental income of a property is more than the total costs involved with owning the property. A positively geared property gives you a secondary income, which is desirable, however it is taxed accordingly. Positively geared investments can also deliver a capital gain if it’s increased in value when it comes time to sell the investment.
Are you the soon-to-be or current owner of a property that’s in need of a little TLC? Instead of waiting till the home has fallen apart, why not consider carrying out small repairs over time as opposed to undertaking extensive renovations. By scheduling minor work for this financial year and making sure that it’s not a renovation or improvement of a capital nature, you can claim a tax deduction. Painting, maintenance plumbing or maintenance electrical all fall under the banner of repairs, while the retiling of a roof or replacement of all cupboard doors would be an improvement. If you’re not 100% if the work you’re planning on carrying out qualifies as a repair or improvement, don’t worry – simply give your property manager a call and they should be able to help.
This one is pretty obvious to an established purchaser, but if it’s your first foray into the world of property investment it may very well escape your mind with everything else to consider. Simply put though, you can’t claim a deduction if you can’t prove that you incurred an expense. By compiling all of your receipts, invoices and statements you can save yourself hours of wasted time and stress trying to do it all at the last minute. Records of payments can include evidence of:
Don’t be afraid to enlist the help of a property manager to organise all of your income either. They’ll normally provide a monthly and annual declaration, plus ensure all bank statements show interest expense.
If your rental property encounters significant losses for whatever reason it’s possible to request the ATO to reduce your normal rate of PAYG withholding to a lower amount. All this means is that instead of getting your standard refund when lodging a return, you’ll increase the amount of take-home pay during the year and get a smaller refund at tax time. You’re then able to use the extra income to pay off loans and give yourself a bit more breathing space.
Capital gains tax is payable on the profit that you make when selling your investment property. At present, a CGT discount of 50 per cent applies as long as the investor holds the asset for a minimum of 12 months. Keep in mind though that the contract date is the relevant date for capital gains purposes, not the date of settlement. Conversely selling it within 12 months of purchase means you’ll have to pay the full amount. If you have other underperforming investments consider disposing these to trigger a capital loss, which can offset against capital gains made on the sale of your investment property.