Investment Property Taxes and Deductions
While an investment property offers opportunities for tax deductions, it will also incur additional taxes for the investor. Here is a breakdown of taxes for your reference, however we do recommend reaching out for a consultation with your financial advisor or accountant.
Property is an attractive investment avenue, particularly with the selection of tax incentives available. While an investment property offers opportunities for tax deductions, it will also incur additional taxes for the investor. Here is a breakdown of taxes for your reference, however we do recommend reaching out for a consultation with your financial advisor or accountant.
Rent and any other rent related income contribute towards increasing your total taxable income. Keep records of any incoming payments as this includes rent as well as any portion of a bond you are entitled to retain, insurance payouts and government rebates.
Capital gains tax applies to the profit yielded when an investment property is sold and the severity of this can be mitigated by strategically timing a sale. Holding onto an investment property for longer than 12 months will reduce capital gains tax by 50%. Capital gains can be offset with capital losses occurring in the same financial year, so timing the sale of an investment property to coincide with losses from another investment avenue could reduce an individual’s overall tax burden.
Properties incur council rates and land taxes which are the landlord’s financial responsibility, however these costs can be claimed as tax deductions as they are an expense relating to the ongoing management of an asset.
A variety of costs associated with managing and maintaining a property are tax deductible, this includes costs which occur when the property is leased as well as vacant and available for rent. Common deductions include but are not limited to advertising, property management fees, body corporate fees, utilities, insurance, legal expenses, cleaning and gardening plus any repairs or maintenance. While the cost of initially purchasing a property is not included, the interest charged on a loan can be a deduction.
Investing in upgrades to your property can increase its value while providing further tax deductions which can be spread over a number of financial years. Depreciation allowances apply to assets which have a limited effective life and can reasonably be expected to decline in value over the time it is used. This type of claim spreads the deduction of the cost over the expected life of the asset. Items generally included are finishes such as flooring, appliances and furniture, this doesn’t apply to permanent upgrades such as painting which is a capital work.
Substantial changes such as structural improvements, extensions or even a new build are deemed capital works and are written off over a longer period of time than depreciating assets. If you purchased a brand-new property within six months of building completion, speak to your financial advisor as you may be entitled to claiming capital works.
Finally, if your investment’s total deductions are greater than the income produced, the property is negatively geared. This position has some risk as the investment is making a loss, however, there is the advantage that the loss can be claimed against other income steams such as salary and in some cases carried forward to the next financial year.
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