property investin
15-Oct-2020 By - team

When looking to purchase a home for investment purposes, it is essential to take into consideration both the costs and the rewards. This way of thinking helps to keep real estate investments in perspective and prevents you from becoming enamoured with the savings mythology. Therefore, let's take a look at the tax on an investment property from both ends of the spectrum so that you can calculate the potential costs as well as the amount of money you could save.

Negative gearing investment property

The term "negative gearing" refers to a scenario in which the expenditures associated with holding an investment property are higher than the rental revenue generated by the property, resulting in a financial loss. In this scenario, the government enables investors to deduct the costs of their investment properties from their taxable income, resulting in a lower overall tax burden. This revenue loss on your rental property can be used to lower your entire taxable income, which may include income from a salary, money from a company, or income from other sources; as a result, your annual tax bill will be reduced. If your total income is not sufficient to compensate for the loss, you may include it as a deduction on your tax return for the next year.

As with any income you generate, the income your investment property produces is subject to income tax. Each year, the income tax on your investment property must be combined with any other personal income you make (such as your salary and other investments) and assessed together in your annual tax return.

The 5 Major Tax Advantages Of Investment Property
  • Depreciation. Depreciation is the lowering in value of your property, as in the building itself, or the things within your property. ...
  • Negative Gearing. ...
  • Capital Gains Tax Exemptions. ...
  • Claiming Interest on Your Mortgage. ...
  • No Tax Paid on Withdrawals from Equity Loan.
Division 43 assets (capital works): you can generally claim 2.5% of the construction cost of your investment property per year from the time that it was built, for 40 years (including the cost of improvements).
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Calculating the rental expenditures that can be deducted from your taxable income is necessary in order for you to assess whether or not you have made a profit from the revenue generated by your investment property. The following is a summary of these deductions; however, for more information, please see the rules provided by the ATO on costs and depreciable assets or speak with a taxes consultant.

So, how does it work? When an investor purchases a piece of real estate, they not only take on financial obligations in the form of loan interest and other associated costs but also begin to accrue rental income. Therefore, the property is considered to be in a negative gearing state as soon as the costs associated with ownership of the property are more than the revenue obtained from the rental of the property.

For illustration’s sake, let’s pretend that the annual rent you earn on your property is $15,200, but the annual costs associated with the property are $17,500. As a direct result of this, it follows that the money you spend on your property can now be deducted from your taxes. Therefore, if you earn $52,000 during this fiscal year, the amount of your income that is subject to taxation will be $34,500. Therefore, you will be responsible for paying tax on this sum.

What are the advantages of using negative gearing for me?

  • Helps you pay less in taxes.
  • The cost of renting the house may now be more easily accommodated.
  • nudges you in the direction of constructing a portfolio.

What are the risks for me?

  • You will be responsible for paying some costs associated with the property.
  • Certain payments, including those made towards the loan’s principal, do not qualify as tax-deductible expenses.
  • You require solid money management abilities.

Several types of investment properties do not have negative equity. For example, some rental properties have a positive rental-to-ownership cost ratio because they collect more rent than their ownership expenses. After this point, the annual profit produced on the property will be considered taxable income and added to your total taxable income. This will be taken into consideration when determining your overall taxable income for the year.

The investment property is subject to the capital gains tax

If the sale of an investment property results in a capital gain, then you are required to pay tax on the profit obtained from the sale of the investment property. When you sell an investment in real estate, the capital gain or loss you realise is determined by taking the capital proceeds and subtracting the cost base from that total. The purchase price and any other associated capital expenses are factored into the cost base.

Importantly, if you have owned the property for more than a year, the capital gains tax (CGT) rate that is applied to the profit you made from the sale will be reduced by fifty percent. Although capital gains tax is not levied when you sell your principal property, you should be mindful of doing so if you plan to rent it out for an extended length of time or if the land it sits on is more than two hectares since this might result in you having to pay CGT. The purchase and sale of vacation houses, vacant land, commercial real estate, and rental properties are all subject to capital gains tax.

You are able to reduce or eliminate the tax impact of a capital gain by offsetting it with other capital losses incurred during the same period as the gain. Therefore, the timing of investors’ capital gains and losses is carefully considered in the effort to minimise their overall tax liability.

Property Tax

This tax, which is often referred to as council rates, is used to finance the cost of community services and garbage collection that the local government provides. Because the amount of this tax varies from council to council, it is important to enquire about rates before making a purchase to prevent being surprised by additional fees.

Land Tax

The only exception is the government of the Northern Territory, which does not levy a land tax. This tax is solely owed on the land value of the property and differs depending on the state in which the property was purchased; as a result, it does not apply to any buildings or other improvements made to the land. In addition, this tax does not apply to the site that serves as your primary residence. Get in touch with your tax preparer so you can figure out how much money this tax will cost you.

Investment Property Tax Deductions

It is important to keep accurate records as well as all receipts related to your investment property since a wide variety of the costs associated with it are tax-deductible. Keep in mind, however, that to claim these deductions, the property in question must be an investment, meaning that you do not live there, and it must either be rented out at the present time or be ready for rental in the future.

Property tax considerations can be intricate. Some individuals prefer consulting with a property advisor for a more informed and tailored perspective.”

The Goods and Services Tax (GST) does not need to be paid on rental properties that are built or refurbished specifically for a renter. If, on the other hand, you are constructing a structure with the intention of selling it at a profit or planning to “flip” the refurbished property in order to make a profit, then you are required to pay GST on the sale, and you will also need to pay capital gains tax.

In most circumstances, your basic tax allowances for your property investment should not be too difficult to understand. The following describe each of these:

What can I deduct?

  • The tenant bears paper, web and billboard advertising expenditures.
  • Costs associated with property management, whether handled by a real estate agency or handled independently.
  • Any costs that the bank may impose, including interest on loans and fees for maintaining loans.
  • Annual council rates, the emergency services levy, and the land tax are the three types of levies that local governments collect.
  • Grounds upkeep and building insurance are included in the strata fees.
  • Depreciation includes the structure of the building, the lighting fixtures, the appliances (such as the dishwasher, refrigerator, and hot water supply), the blinds, the carpeting, and the flooring, as well as new additions like an upgraded kitchen.
  • Maintenance and repairs include landscaping, painting, plumbing, general upkeep, and normal wear and tear.
  • Coverage for building owners and landlords provided through insurance.
  • Stationery includes things like receipt books, pens, printing, and paper, as well as the expenditures associated with using the phone.
  • Accounting and bookkeeping, including record keeping and tax preparation
  • The conveyancer will pay legal expenses at the time of purchase.
  • Utilities include the installation of water, gas, and electricity and recurring costs for sewage service.
  • Travel expenses are included in the costs connected with inspecting the property.

Although this is a comprehensive list of products that qualify for a tax deduction, it’s possible that there are others. Therefore, you must always discuss your tax return with your accountant before submitting it.

Calculating your investment property’s tax deductions

The mortgage, continuing administration and maintenance expenditures, and depreciation on rental property assets are all examples of expenses that may be claimed as tax deductions related to rental properties. Be sure to maintain all receipts for your expenses and to keep meticulous records of any dealings that pertain to your investment property.

The sale of assets that were purchased after September 20, 1985, the date on which the tax was first implemented, is subject to the capital gains tax. On the other hand, a declaration of gain or loss on certain capital improvements that were made to the property after this date could be required.

How is capital gains tax calculated?

  • The price at which you sold your property.
  • Less the purchase price and any expenditures associated with buying, owning, and selling the asset.
  • If you have owned the asset for more than a year, you are eligible for a reduction on gains of up to 50 percent.
  • Your annual income in the year when the property was sold.

You cannot claim:

  • The expenses incurred throughout the process of purchasing or selling the investment property
  • Any costs that are associated with the fact that you are personally using the investment property
  • Any costs associated with utilities that renters bear
  • Any expenditures connected with borrowing money that are dependent on the investment property’s equity and that pertain to private usage, such as acquiring a home or remodelling an existing one, are referred to as related borrowing costs.

Expense claims you can make include:

  • Costs associated with the interest rate on mortgages and banking costs
  • Taxes on the property, as well as the council and the water
  • Costs associated with cleaning, insect control, gardening, repairs, and upkeep
  • Insurance, maintenance fees, and major renovations all need to be paid.
  • Promotion of renting spaces and collection of management fees from agents
  • It is necessary to travel in order to examine or maintain the property.
  • Costs of the loan, including interest and fees that are associated with the financing of a depreciable asset for use in the refurbishment of real estate or rental property
  • The reduction in an asset’s value due to the passage of time also known as depreciation (for example, stoves, air conditioning units, hot water systems and fans).

Investment Property Tax Depreciation Tips

One of the most essential actions that you must take as an investor is to submit a claim for the depreciation of your property. In addition, the sole deduction might be open to interpretation.

Avoid Properties with a 4% Building Allowance.

Residential properties constructed between July 18, 1985, and September 15, 1987, were subject to a building depreciation rate of 4% throughout this period. Everything constructed after that point is subject to a rate of 2.5 percent.

If you end up purchasing a home that was constructed in 1986, it indicates that 23 of the property’s usable 25 years have already passed (from 2009 to 1986). Therefore, you will be restricted to depreciating the residual value at a rate of 4% for the following two years only. On the other hand, if you purchase a home in which construction began in 1989, you will still have 20 more years to depreciate the home at a rate of 2.5 percent.

That’s fifty percent of the initial building cost left for you, as opposed to just eight percent; I know which option I’d like to have!

Claiming the Residual Value Write Off

As a result of changes in the scope of what constitutes “plant and equipment,” I predict that millions of dollars will understate tax depreciation claims over the course of the next several years.

When I initially began writing depreciation reports, a number of considerations went into deciding what should be included on the list.

Among these was the question of whether or not the component was required in order to make the property suitable for leasing. For example, a kitchen is an unquestionable requirement, although a microwave oven was not.

The moral of this anecdote is that if you are renovating a kitchen or bathroom in a home that was built after 1985, you should hire a quantity surveyor before you start the demolition phase so that they can determine the value of the objects that will be demolished. This is because a quantity surveyor will be able to determine the worth of the objects that will be demolished.

This value can still be claimed as an outright deduction, which can result in significant cost savings during the first fiscal year.

For illustration’s sake, a rental property that has a kitchen that is 20 years old and cost $10,000 to instal immediately qualifies for a deduction of somewhere in the neighbourhood of $5,000.00.

Depreciation schedule

Supposing you owned a rental property or had a signed a contract to purchase one before 7:30 pm on May 9, 2017, you are eligible for a tax credit. In such a scenario, you have the legal right to submit a claim for a deduction in the amount of any value lost due to the depreciation of any assets that were contained within the property previous to the date in question.

If you bought it after this date, you were only allowed to claim depreciation on brand-new assets or on properties that had been recently built or considerably remodelled, provided that no one else had previously claimed any depreciation deductions on the item you were purchasing.

Furnish your Property

Another approach to boost your property’s value and enhance your depreciation deductions is to furnish it. This is because furnished homes have higher depreciation rates.

For instance, if a developer provides a furniture package for $20,000, the taxpayer may be eligible for an extra $10,000 deduction in the very first year of ownership. So, in addition to the various options for your depreciation, furniture can really help improve your overall claim.

Maximise the Cost of Construction

When calculating the amount of a property’s annual depreciation, the initial construction cost must be considered.

A significant number of our customers are currently purchasing houses at prices that have been drastically lowered, which are closer to the initial cost of construction.

The piece of advice here is to take advantage of the way the market is now functioning and look for houses where the real building cost is relatively close to the purchase price at the moment.

Because our company was in charge of the quantity surveying for the project, I am aware that the initial construction cost for the unit was $175,000. However, the buying price for it — when it was fresh new – was $335,000.

What do you think? You continue utilising the original construction cost as the basis for the new property investor.

Therefore, not only has the new buyer paid less stamp duty and enhanced their possibility of making a profit on their investment, but the new buyer’s depreciation deduction in relation to the purchase price has also grown.

This means that the cash flow from this property would be positive at best and cash flow neutral at worst.

Old Properties Depreciate too.

Even properties constructed before 1985, the year the building allowance was implemented, have value and can be depreciated. Your home’s buying price incorporates all of its components—the land, the building, the plant, and the equipment. We are here to assist you in allocating or dividing up those categories in our capacity as quantity surveyors.

In approximately 99 percent of the situations, we identify sufficient quantities of plant and equipment items to validate the financial investment required to hire our company.

Small Items and Low-Value Pooling

Because an item should be deducted as soon as feasible, given that a dollar now is worth more than a dollar tomorrow.

Deductions can be made right away for individual products that are less than $300.

Remember that as long as your share of the cost is less than $300, you may still deduct it from your taxes. This is an essential point to keep in mind.

Take, for instance, the cost of $2,000 for an electric motor to be installed in the apartment building’s garage door. Your share is forty dollars if there are fifty apartments in the building.

Because your share is less than $300, you are entitled to a direct payout of that $40.

You might also consider purchasing things with a higher rate of depreciation. For example, items with a value between $300 and $1,000 are considered to be in the Low Pool Category, which has a higher rate of depreciation.

For illustration purposes, a television that costs $1200 is eligible for a deduction of 20%, while a television that costs $950 is eligible for a deduction of 37.5 percent annually.

The Taller the Building, the Higher the Depreciation

Plant and equipment allowances tend to be larger for structures with a greater height, and the bigger the amount of plant and equipment, the greater the amount of depreciation.

Both the essential services provided by the building as well as the components of the structure itself are referred to as the “plant” and “equipment”, respectively.

As the height of a structure increases, the need for certain services, such as an elevator, becomes more apparent (transport service). However, other services have a lower level of visibility, such as the depreciation of fire hose reels and intercoms, both of which fall under this category.

The provision of facilities by the building’s developer is the second factor contributing to the larger plant and equipment ratio in tall buildings. Some high-rise buildings, for instance, are equipped with swimming pools, fitness centres, and even on-site movie theatres.

Okay, let’s take a look at the monetary totals. The first thing that must be done is to get a reasonable estimate of the cost of plant and equipment to the total cost of construction.

All of these allowances are based on a property that costs $400,000 and is located in a capital city; nonetheless, they are merely meant to serve as rough estimates for the purposes of illustration.

As can be seen, the height of the structure has a direct bearing on the potential amount of value that is lost due to depreciation. Keep in mind, however, that the height of a building is not necessarily correlated to the amount of money it is worth as an investment.

It is typical to imply that there will be more taxes and fees, as well as a reduction in the amount of land that you possess. However, in the end, it is up to you to weigh the benefits and drawbacks of the situation… and pick one option over the other.

Keep in mind that accumulating wealth is not something that just happens; rather, it is the result of a well-laid strategy that has been successfully implemented.

Whether you operate a business, are a professional, or make a high salary, we are able to give you with an individually crafted solution that incorporates the basic disciplines of taxation, superannuation, and property investment interlaced with finance, asset protection, succession and estate planning, personal risk insurances, and charity. We do this for each of our clients.

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