Investment Property Tax Benefits: What You Need to Know

It's no secret that Real estate investment can be a great way of realising passive income in your retirement or a mechanism to offset your tax. However, speaking to many people on early on in their property investment journey, these nuances aren't as commonly known. People get deterred the moment you start talking about the tax benefits and the mental arithmetic around things like negative gearing opting to instead hold on to savings or alternatively investing in other risky endeavors with no tax incentives. The simple matter is, when you own an investment property, the current tax laws allow property investors access to several incentives. This quick read, aims to help you navigate the most important and relevant tax benefits linked to real investment properties and how to maximise them.

Depreciation Deductions

A common tax reduction mechanism to be familiar with is something called depreciation. Depreciation in simple terms is your property decreasing in value over time due to wear and tare attributed to two main parts of the home, (1) the structure and (2) the fixtures of the property. According to the ATO, property owners are entitled to depreciation of the building for over 40 years from the initial build cost. They can even approximate the depreciation amount over the life of the property through something called a depreciation schedule. Depreciation applies to most things fixed to the house such as as carpets, appliances their effective life. Your accountant will know this in depth so make sure to get in contact with them to get your head around things you can rightfully claim through depreciation.

Interest Deductions

Another tax advantage of investment properties is probably the most appealing to many people today: you can fully deduct the interest on your investment property mortgage. If you have used your money to borrow to finance the purchase of the investment property, then the interest of the loan you used is also allowed as a tax relief. It can go a long way in your tax liability. Speaking with a financial planner on how to invest in a property, means that your loan arrangement will be set in a manner that will allow for this benefit to accrue.

Other Loan-Related Deductions:

Besides mortgage interest, more costs which can be depreciated include loan establishment fees, mortgage insurance, and other related loan maintenance costs.

Operating Expenses

If you hire property management specialists to take care of managing your property, a good idea especially if you're buying interstate, then these fees are also tax-deductible. This is in the form of charges for services like credit checks on tenants, rent collection and repair services. Fees for property management may be relatively high therefore any cost incurred in this field can attract deductions.

Capital Gains Tax (CGT) Concessions

Something that catches a lot of people off guard is Capital Gains Tax. But there is reprieve from the tax man being offered for properties owned for a period of time. To explain, if you own the property for over 12 months then you can enjoy a CGT discount of 50% off the profits from the sale. To understand this in depth, speak to your accountant or financial adviser who can take into account your financial position to best advise on how to navigate CGT.

Negative Gearing

With holding costs at the moment tipping most houses into the negative cashflow for holding an investment asset, negative gearing means becomes a great mechanism to reduce the total tax you pay. In simple terms, you can offset the costs of owning an investment property with the income that comes from it for a net loss. This loss can be utilised to lower off other income including the salary that one earns, reducing the amount that will have to pay come tax time. Tax deductibility is widely practiced by property investors in Australia including negative gearing which enables tax breaks on the losses incurred through property investment with the prospect of gaining from future capital appreciation.

It is not easy to understand the various aspects of negative gearing and thus, has to be planned and dealt with expert advice. It is highly recommended to consult with your accountant or financial adviser to adjust your financial strategy accordingly. They can also offer consultative services to guide you in approach so that they are relevant in the ever-evolving market.

To conclude, the complexity of taxes related to investment properties is a strong factor, which influences your return and objectives; thus, mastering all the essential aspects related to taxation can be helpful. From depreciations and interest deductions to capital gains tax benefits and the negative gearing arrangements there are numerous ways on how one can minimise taxable income and at the same time, maximise the profitability from your investment purchase.