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
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.
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.
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 an accurate tax return.
By claiming property depreciation, you can reduce your taxable income. Tax depreciation is available for both residential and commercial properties.
BMT Tax Depreciation’s specialist quantity surveyors make sure all claims are maximised, ensuring you claim all available deductions compliantly. The BMT Guarantee means if we can’t obtain at least double our fee worth of deductions in the first full financial year claim, there will be no charge for our services.
For more information on the tax benefits of investment property and how to claim depreciation, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote.
BMT recommend consulting a financial advisor before making important financial decisions.