Tax Benefits of Buying Investment Properties

Property investing has proved itself is a wealth creation vehicle for many generations now. Many families have built their wealth on property acquisitions over a long period of time which now places them in an enviable financial position.

As it becomes clear that current superannuation plans may leave many retirees in a less than comfortable position, the property market provides an alluring alternative. But it is not just a simple matter of buying a property and rubbing your hands with glee at the inevitable positive returns. Careful professional advice is required and tailoring an investment strategy to suit your individual circumstances is vital.

Many first-time investors make glib references to the tax advantages that attached to property investment but a few simple points still need to be clarified. In this article will examine the important taxation considerations of property investment including negative gearing, depreciation, capital gains tax, and how tax benefits can make your investment pay.

  • Negative gearing. This term simply describes the fact that you are borrowing money to make an investment. When the costs of the investment are higher than the return you achieve, you are said to be negatively geared. For example when an investment property has an annual net rental return which is less than the interest charged on the investment loan, the property is said to be negatively geared. This loss of income from the property is eventually made up over time as the property value increases. In the meantime however a high income earner can benefit from this as the losses can be offset against their taxable income. Although you should never specifically aim for a negative gearing position, you can take advantage of it if it suits your personal circumstances, and if the properties capital growth potential is going to be positive and greater than the cost of funds, otherwise it is a futile endeavour.
  • Depreciation. One of the tax advantages in owning an investment property is that you can claim for depreciation of certain items and reduce your taxable income in the process. Things like refrigerators, furniture and cooktops can be written off over the effect of life of the asset. Naturally, you need specialist advice here and an accountant is the obvious choice. The Australian taxation office determines the schedules and allowances but you still need the services of an accountant and a quantity surveyor to make sure you get the greatest depreciation deduction. New properties have greater depreciation. You can claim two components, the building as well as the fixtures & fittings.
  • Capital gains tax. This is charged on the capital gains that your investment property enjoys over the period you own it only if you sell it You become liable to pay the capital gains tax where your gains exceed your capital losses in any income year. This is where specialist advice really comes into its own as you can take advantage of capital losses if you sell the property at the right time. This is a very complex area that your specialist property adviser or accountant can assist you with. Otherwise if you are building wealth, you can get your property revalued and lend against its increased value to purchase another property without triggering capital gains tax.
  • Making your investment payoff. After you have owned an investment property for a number of years, you are likely to enjoy substantial capital gains. Additionally, your rental income over the same time can greatly assist loan repayments to a point where it there is very little effect on your cash flow, or to the point of being positively geared. Reviewing your position at that time, you may be ready to add another property to your portfolio.

Take advantage of these tips and plan your property investment strategy only after consultation with experts.


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