In our experiences at Infinity Accounting & Financial Services, we see investment properties as a great way to pay less tax. This is because there are many deductible expenses that can be offset against your rental income, such as interest on loan, borrowing costs, management fees, council rates, body corporate fees and the list goes on. We usually find that once all these expenses are deducted from your rental income, your property will be ‘negatively geared’. If you haven’t heard of ‘negative gearing’ before it means that you have more expenses than income from that property. However, this is the main tax benefit arising from investment properties, it basically softens the blow of holding a negatively geared property by allowing you to claim the loss on your property as a deduction, consequently reducing your overall taxable income. Whilst you’re making a loss in the property in terms of rental, it is important to remember that your property will be increasing in value the longer you hold it and the cherry on top of the cake is that you receive tax benefits, giving you a bigger return come tax time.
Whilst the expenses that have been mentioned earlier are important, the most important and usually one of the largest deductible expenses in an investment property is one that you actually don’t have to pay anything for. This is called depreciation, which is the estimated decline in value of the building portion of your property. This means that as your property as a whole is increasing in value, the building portion is declining in value as it gets older and the ATO allows you to claim a ‘capital allowance’ to offset this. As this is an allowance, this is not an expense that comes out of your pocket. However, to make most of this benefit it is recommended to build or buy new/newer properties as depreciation is always highest earlier in the life of a property.
Remember, investment properties are a great opportunity to save on tax whilst you benefit from owning a property that increases in value over time. For further information on Investment properties and/or the tax benefits of investment properties please call us on 03 9792 2772.