Does owning an investment property affect your taxes? It certainly does.
The income generated from the property is included in your taxable income on top of other income sources, such as your salary.
But owning an investment property doesn’t necessarily mean paying more tax. In fact, it can also lead to you paying less tax while building capital.
In this article we will explore:
- Rental property income
- Rental property expenses
- Property depreciation – the deduction without an expense
- What gearing is best for you?
Rental property income
The rental income you receive from your investment property is included in your annual taxable income.
Given that property is usually a stable, long-term investment, it’s easy to estimate the income stream it provides. Residential leases often run for 6 to 12 months and the national vacancy rate is currently stable at 2.1 per cent. This means on average, properties only sit vacant for one week a year.
Rental property expenses
Claiming expenses goes hand-in-hand with reporting the income you receive.
Most costs associated with owning and operating the rental property can be claimed in the financial year the expense was made. Some of the top rental property expenses include interest repayments, depreciation, insurances, council rates and charges, property management fees and more.
The only types of expense you can’t claim are capital expenses. These are the foundational costs of owning the investment property such as the cost of land, building and pest inspections prior to the exchange of contract and stamp duty. These are assessed when calculating the cost base to work out capital gains tax (CGT) when the property is sold.
Sometimes the rental property expenses can be more than your income, especially in the earlier years of ownership. When this occurs, it means your property is ‘negatively geared’ as it’s making an overall loss.
The loss from your investment property can be used to reduce other assessable taxable income like your salary, meaning you pay less tax.
Property depreciation – the deduction without an expense
Property depreciation is one of the most beneficial deductions you can take advantage of. It’s the second-highest deduction available to property investors, after costly interest repayments.
Not only can you claim it for up to forty years, but an added bonus is that you don’t need spend any money to claim it.
This is because depreciation is the natural wear and tear of a property and its assets over time. This depreciation is treated like other expenses and is deducted from your taxable income each year.
What gearing is best for you?
There is no ‘right’ answer to this question. It depends on your own investment strategy.
Most Australians have debt associated to their property and are therefore running at a loss. This allows them to take advantage of negative gearing.
Property investors sometimes intentionally negatively gear their property. They do this to reduce their taxable income as their property grows in value. While self-funded retirees may have a different strategy, aiming for positively geared property, as their investments are their main source of income.
Having a trusted investment property team around you will help you establish a solid strategy, making your rental property income work for you.
For over twenty years, BMT Tax Depreciation has helped over 700,000 investors claim property depreciation and boost their cash flows. To learn more about depreciation and the services that BMT offers, Request a Quote or call 1300 728 726.