Property investment is broadly acknowledged as an effective way to build wealth, but as a means of reducing your personal income tax it doesn’t always get the recognition it truly deserves.
We should say at the outset that we don’t endorse the idea of getting into property investment purely as a tax mitigation strategy. But if you are weighing up new investment options and you are paying too much tax (and who isn’t), property investment can be a great solution.
The ATO allows you to claim a range of legitimate deductions in relation to your investment property. These costs will typically include things like the interest proportion of any repayments on the loan used to buy the property, council and water rates, maintenance, insurance, vacancy costs and rental management fees.
Certain costs related to capital improvements to your investment property – such as an extension, pergola, garage, etc can also be claimed. It is important to note though that capital improvements and construction works are treated like asset depreciation. This means that they are not recognised in total during the tax year in which they occurred. Instead, they are claimed progressively over a span of years.
For new properties, some of this can be provided by the developer. It is also part of the information pack we prepare for each of our clients when helping appraise any of our off-market opportunities.
Genuine deductions for expenses related to your investment property can then be claimed against your personal income.
The level of impact depends in part on the overall cashflow position of the property and whether your investment property is positively or negatively geared.
Calculate your pre-tax profit
To work out if an investment property is positively or negatively geared, you will need to calculate the pre-tax cashflow for the property.
Positively geared properties are investment properties where the rental income your property generates covers or exceeds the costs (before tax claims) associated with holding and maintaining the property. In many cases any surplus from the property will be attributed (added) to your personal income for the year before your tax for the year is calculated. While positively geared strategies have lots of benefits, from a tax mitigation perspective this outcome is less than ideal.
Negatively geared properties do the reverse. These properties cost more to run than the rental income they generate. This means that any shortfall between costs and rental income is paid for by you. The good news is that in many cases this shortfall can be claimed, along with the costs and deductions, and deducted from your taxable income before our income tax calculations are made.
At worst, this will reduce your taxable gross income. At best, it may be substantial enough to move your taxable income into a lower tax bracket.
Seek professional assistance
But there are some caveats. Firstly, you can only claim expenses and deductions for periods during which the property was tenanted or genuinely available for rent. Also, properties that are bought and operated as investment properties are subject to capital gains tax if/when they are sold.
Finally, everyone’s circumstances are different. We strongly recommend that you seek professional assistance in working out how investment property can best work for you.