Successful property investing is a fantastic way to grow wealth. Yet, buying a rental property is not a licence to print money and success typically involves running the investment like a small business. Therefore, before you embark on property investing, it’s usually smart business to consult with your accountant first.
Negative gearing, in simple terms, is when you borrow money to buy an investment asset. If that asset fails to generate enough income to cover mortgage expenses and other costs, these “losses” can be written off against the income tax you owe at the end of the financial year. You need to ask your accountant whether there are any tax advantages from negative gearing based on your income level or whether you are better off trying to buy a ‘positively geared’ investment, where the tenant pays the mortgage for you.
Whether you buy an investment property in your own name, using a company name, by means of a self-managed super fund or in a family trust will depend on your financial situation. This is a discussion you should have with your accountant.
While taxation should not be the sole motivator in buying an investment property. Nonetheless, the failure to consider taxation could cost you plenty. A tax efficient structure ensures the overall taxation position of your property investment is maximised.
The answer to this lies in the tax law relating to ‘depreciation’ which refers to the declining value of an asset, such as a house or apartment with the passage of time, due to wear and tear. As a rule, the newer the property, the more an investor can claim, making purchasing a near-new house or apartment potentially more worthwhile, in a taxation sense, than an established home, at least for the first five or so years of ownership. That said, the renovation costs involved in refurbishing an older property may be depreciated over a set period.
Almost 50% of landlords fail to make depreciation claims against their investment property, potentially missing out on thousands of dollars come tax time. So, the answer is a resounding yes. But ask your accountant anyway.
Yet many landlords either aren’t aware of the benefits associated with depreciation. Or they don’t have an up-to-date depreciation schedule enabling them to claim against the reduction in the value of items such as carpets, curtains, stove cook tops, some light fixtures, shower heads and so on. Better still the costs associated with a depreciation schedule, which can be between $650 and $700 per report, are tax deductible.
Landlords can claim between 10% and 20% against the values of a variety of depreciable items, and sometimes more, and in many cases, 2.5% of the building cost of the investment home on an annual basis.
From time to time, carpets, stoves and ovens might need repairs or replacements, while a coat of paint or some new blinds maybe required every 5-10 years. It’s often best to keep some money in the kitty for these costs, so that your investment property continues to look its very best. A well-maintained property will keep quality tenants happy and committed. To ensure you have this financial war chest in place, talk to you accountant about the value of budgeting.