Using tax to maximise property profits
You may be considering buying property or have already sealed the deal. If you want to maximise your return from the property you need to make sure that you take advantage of all possible tax benefits while you have ownership of the property.
Structure needs to be considered (individual ownership, owned jointly, a family trust or a superannuation fund) before investing as this has important consequences on your final tax position.
2. Assessable income
Rental income paid by the tenant is included in taxable income.
3. Capital costs
Your costs can be either of a capital nature with long term benefits or costs which are used up or “consumed” during the year. Items of a capital nature include the purchase price of the property, stamp duty, legal fees, costs of building/pest reports. They cannot be claimed upfront and will form part of the cost base in calculating any capital gain when you sell the property. A deduction of 2.5% of the construction cost (called “capital works”) is allowed each year for properties constructed after 15 September 1987. Mortgage insurance (which is charged when you borrow over a certain percentage of the value of the property), loan establishment fees, legal fees and stamp duty associated with the mortgage, valuation and survey fees are called borrowing costs. These are deductible over 5 years or the term of the loan – whichever is less.
Interest paid is usually the biggest cost for most investors and deductibility depends on the “purpose” of the loan rather than the security. Other costs that are deductible outright include agents commission, advertising, body corporate expenses, cleaning, council rates gardening/lawn mowing, insurance, land tax, sundry legal costs, pest control, stationery / phone / postage, repairs and maintenance and travel to inspect the property.
5. Negative gearing
You may be able to offset any rental loss against other assessable income and reduce your annual tax liability. T You can also ask the ATO to reduce the amount of PAYG tax taken out of your wages by your employer. This allows you to take advantage of the reduced tax each pay period rather than at the end of the year when you lodge your tax return.
Example of Negative gearing
Income: Salary $75,000
Rental income $23,400
Council rates 1,800
Body Corporate Fees $2,500
Management Fee $2,060
Total outgoings $35,960
Net cash outflow -$12,560
Non-cash flow deductions
Capital works deduction $6,250
Depreciation on fixtures & fittings $4,000
Borrowing Costs $1,000
Net rental loss (for tax purposes) -$23,810
Taxable income $51,190
Medicare levy $759
Total Tax $10,536
|Negative gearing effect (tax saving)|