Houses, apartments and offices are very popular investments, and depending on market conditions, property can be considered a relatively low-risk investment and less volatile than market shares. For long-term investors, investing in real estate is one of the best ways to increase your investment portfolio. Depending on your investment strategy, property investing can have tax benefits.
Here is a list of some property investment tax benefits that you could be missing out on.
1. Tax Deduction as a Result of Negative Gearing
Negative Gearing is a form of financial leverage whereby a person borrows money to purchase an income-producing property. However, the gross income generated by the property investment is less than the cost of ownership and maintenance including the interest from the loan taken out for that property.
Thus, a property owner can claim a tax deduction as a result of owning a negatively geared property. The loss can be offset as a deduction against the personal income received by the property owner within a given taxable year.
2. Tax Deduction for Depreciating Properties and Other Assets
Another tax benefit that property owners may be missing out on is tax depreciation claims on depreciating properties and other assets.
Most properties appreciate overtime but some aspects of a property depreciate overtime, like machinery and equipment.
The Australian Taxation Office defines depreciating assets as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used.
Investment properties depreciate in two ways. First is through depreciating assets, which may include: air conditioning units, hot water systems, carpets, ovens or heaters to name a few. The formula used for computation is based on acquisition cost.
The second one is building allowance or capital allowance depreciation and is related to the cost of construction itself or the capital works on the building.
Most owners are aware of tax deductions on depreciating properties and assets like machinery and office equipment like computers, electric tools and furniture. What they are not aware of, however, are those falling under capital allowance depreciation, which may include doors, windows, tiles, fences, retaining walls, garages and other works for the improvement of the property.
The advantage of claiming tax depreciation is that the value of the property increases overtime giving you a greater return on your property investment. You can also save on tax and those savings can be redirected to other financial concerns like payment of mortgage or reduction of other property related debts.
3. Exemption from Payment of Capital Gains Tax on Properties Sold by Pensioners
One very generous tax-break that a property owner can actually take advantage of is from the sale of properties when one becomes a pensioner.
Under this rule, a person over 60 who has established a pension is exempt from paying tax on capital gains or investment earnings. This is not tax avoidance as many pensioners would like to have a liquid asset at their disposal but the Australian Tax Office have recently issued a warning about selling property straight after qualify for this tax break.
If you have any questions regarding tax depreciation on your property, contact the ATO or your accountant or suitably qualified quantity surveyor for advice.
To learn more about a Strategic Property Management approach, call Michelle on 0411 278 324.
We are happy to answer your questions or explain how we can help you manage your investment property better.