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6 tax benefits of owning an investment property

BMT team — Fri, 26 Apr 2024 01:37:43 +0000

There are significant tax benefits of owning an investment property, even if a property is not producing an immediate profit. Here are 6 tax benefits of investment properties all investors and property managers need to know about: Negative gearing Capital gains tax exemptions Claiming interest on your mortgage Equity loan withdrawals are tax free Small expenses Depreciation Negative gearing An investment property is negatively geared when the return, or rental income is less than the property’s expenses. Essentially, this means the property is making a loss and the cash flow is negative. This is not necessarily a bad thing; it actually can create a substantial tax benefit because the property owner can claim the loss as a tax deduction to offset their taxable income, meaning they pay less tax. If the rental payments are not covering the mortgage payments and other outgoing fees, the property owner can claim this loss as a tax deduction. Read more: Uncover additional benefits of negative gearing property Capital Gains Tax exemptions Capital Gains Tax (CGT) is the tax paid on profits from selling assets. When a property is sold, there is usually a gain or a loss. In the event of a gain, the seller needs to report this as income. The gain will then be added to their annual taxable income and the total amount will be taxed at the individual’s tax rate. There are discounts available if the individual has owned the asset for more than twelve months. A property owner is entitled to a fifty per cent discount on CGT if they have held the property in their name for more than twelve months, from the date of signing the contract. If a property is sold in a period shorter than twelve months, owners will have to pay full capital gains tax. This tax rate is dependent on the individual’s income. It’s important to note your main residence is generally exempt from CGT due to the ‘main residence exemption’. A home is classed as a main residence by the Australian Taxation Office (ATO) if it has been the home of you, your partner, or other dependants for the whole period you have owned it, has not been used to produce income, or is on land two hectares or less. There are other allowances for specific situations such as partial discounts for individuals who are renting out part of their home or using part of their home for an income-producing business. In these cases, CGT would be exempt for their part of the living area within the property. Claiming interest on your mortgage As an investment property owner, you can claim the interest charged on your investment property loan as a tax deduction. The interest is a cost obtained from money being made through the property. This can only be claimed if the property is being used to earn an income, owner occupied properties are not eligible for any tax deductions. Equity loan withdrawals are tax free If your property increases in value but you don’t want to sell, you can withdraw a portion of money through a home equity loan, perhaps for another property or other investment opportunities. The benefit of this is you don’t pay tax on these withdrawals. This is because you haven’t increased your financial position through deriving income, you are drawing out equity from the property in the form of a loan rather than selling to release the equity and generating a capital gain. It’s key to remember that the interest payments will only be deductible if used for other investment purposes. It’s important to always speak to a financial advisor before making big decisions. Small expenses There are many small deductible expenses which all property investors should be claiming. These could add up to thousands of dollars. Things like land tax, strata fees and council rates can be claimed as a deduction. Further examples of available deductions include insurance, legal expenses and bookkeeping costs. Deductable expenses can also be available to claim in cases where part of the property is being rented out or used to produce an income. Repairs and maintenance can be claimed immediately if they are directly related to wear and tear. However, if assets are solely replaced through renovations to increase the value of the property, these will need to be claimed as a capital works or capital allowance deduction. According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. Maintenance is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion. All costs incurred to repair or maintain your investment property can usually be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are used to work out your capital gain or capital loss when you sell the property. Depreciation As a building gets older, its structure and the assets contained within it wear out – they depreciate. The Australian Taxation Office (ATO) allows owners of income producing properties to claim this depreciation as a tax deduction. There are two different types of depreciation you can claim. Capital works (division 43) deductions can be claimed for the wear and tear that occurs to a building’s structure and items permanently fixed to the property such as built-in kitchen cupboards, clothes lines, and fences. Then there is plant and equipment depreciation (division 40) on items which are easily removable or mechanical in nature such as air-conditioning units, security systems and light fittings. An investment property owner will need a tax depreciation schedule to claim these deductions. A tax depreciation schedule outlines all available property tax deductions you can claim, and your accountant will then use it to lodge […]

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Loss carry-back measure to allow businesses to claim more now

BMT team — Sun, 25 Oct 2020 23:12:23 +0000

The private sector is an engine-room of the economy, producing 8 out of every 10 Australian jobs. The 2020-21 budget includes several measures that will give the COVID-hit sector a kick-start and help businesses keep their workers. An unprecedented decision from this budget is the allowance of businesses to apply tax losses against tax profits from a previous financial year. This measure is called the loss carry-back. Content: What is the loss carry-back and how does it work? How can businesses make the most out of the loss carry-back? Businesses can achieve maximum carry back with BMT What is the loss carry-back and how does it work? Under the loss carry-back measure, businesses with an aggregated turnover of up to $5 billion can apply tax losses against tax profits in a previous financial year. The $5 billion threshold covers 99 per cent of businesses, Australia wide. The initiative allows eligible businesses to carry back tax losses from the 2019/20, 2020/21, or 2021/22-income years to offset previously taxed profits in 2018/19 or later income years. The new measure essentially backflips the previous arrangement, where businesses normally must return to profit before they can use these losses. This allows businesses doing it tough due to the pandemic to use their losses now and receive a healthier tax return. For example, under the previous arrangement, if a business made a loss in the FY 2020-2021 and didn’t return to profit until FY 2022-23, they would’ve had to wait two whole years to claim back the loss they made. However, the new claim back measure would allow this business to use its FY 2020-21 loss to amend its tax returns going all the way back to FY 2018-19. Doing so would result in an immediate reimbursement of tax previously paid. To be eligible, the tax refund requires the amount carried back isn’t more than the earlier taxed profits and that the carry back doesn’t generate a franking account deficit. It’s estimated that the combination of the loss carry-back and the full expensing measures will create an additional 50,000 Australian jobs. How can businesses make the most out of the loss carry-back? BMT Tax Depreciation has analysed this new measure and has found that a tax depreciation schedule will help businesses claim back the maximum amount. Any business, whether they own the property they operate from or lease it, can benefit from lucrative depreciation deductions. Depreciation is the natural wear and tear of a property and its assets over time and claiming depreciation reduces tax liabilities. One of the most beneficial features of depreciation is that it’s a non-cash deduction, meaning businesses don’t need to spend any money to claim it. So unlike other losses a business could be experiencing such as a reduction of patronage due to COVID-19 restrictions, the business doesn’t have to make a fiscal loss to claim depreciation. Therefore, if a business organises a depreciation schedule now, claims the deductions and uses these to amend previous returns they can get a much bigger financial benefit. Businesses can achieve maximum carry back with BMT A tax depreciation schedule is the best way to identify all the deductions a business owner can claim. BMT Tax Depreciation has completed schedules for thousands of businesses across the country. When preparing a schedule, BMT will conduct a site inspection to ensure that everything is claimed, and full compliance is maintained. Their comprehensive commercial schedules include every business incentive available. To learn more about depreciation and how BMT maximises deductions for business owners, Request a Quote or call 1300 728 726.

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Four tried and true ways property investors make their money

Bradley Beer — Fri, 09 Aug 2013 06:28:24 +0000

Property investors often ask whether their strategies should be influenced by recent market conditions. As Benjamin Franklin once said, “an investment in knowledge pays the best interest.” So it’s also logical to say that investors who do their research and increase their knowledge about the property market will also see better results from the strategies they put into place. That being said, no matter what the external market conditions, there are always tried and true factors that a property investor should be aware of. Which leads us to the four ways property investors make their money, as mentioned in the latest article from Metropole Property Strategist, Michael Yardney. The four ways property investors make their money: Capital growth – the increase in value of their properties Rental returns – which provide cash flow Tax benefits – such as depreciation allowances and negative gearing, and Forced appreciation – this is where an investor ‘manufactures’ capital growth through renovations or development. Whether you’re a first time investor, you already own an investment property, or you’re planning on buying your second or even tenth investment property, it’s important to consider all of the above factors. If you’re buying a new property, look at the historical growth of properties in the area, local employment drivers and the proximity of the property to local services and facilities. Also ask your Real Estate Agent for a rental appraisal of the property. Most importantly, ask a Quantity Surveyor to provide an estimate of what depreciation deductions will become available once you have purchased the property and it becomes income producing. If you already own an investment property, if you haven’t already done so request a tax depreciation schedule from a Quantity Surveyor so you can claim the maximum deductions available as part of your annual tax assessment. If you’re planning on renovating, also make sure to get a schedule before and after you complete the renovations so you can claim the remaining depreciable value of any removed assets as a write-off in the year the assets are removed.

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