Tax Issues With Property Investing
Tax
Many people invest in property with the aim of taking advantage of Australia's negative gearing rules.
Negative gearing
Gearing basically means borrowing to invest. Negative gearing is when the costs of investing are higher than the return you achieve. With an investment property, thats when the annual net rental income is less than the loan interest plus the deductible expenses associated with maintaining the property (such as property management fees and repairs).
When youre negatively geared you can deduct the costs of owning your investment property from your overall income reducing your tax bill. High-income earners benefit the most, because theyre in the top tax bracket.
In addition, while you record a loss on the income from the property, in theory capital gains in the value of your property should make the investment worthwhile.
But dont over-commit to property just to get a tax deduction. Those tax benefits generally don't come until the end of the financial year and you have to make your mortgage payments in the meantime.
See www.ato.gov.au for information about pay-as-you-go (PAYG) withholding payments.
Depreciation
The owners of investment properties can also claim depreciation of items such as stoves, refrigerators and furniture. That involves writing off the cost of the item over a set number of years the effective life of the asset.
The ATO sets out what it considers to be appropriate periods. The cost of a cooktop, for instance, is generally written off over 12 years you claim one-twelfth of its cost as an expense each year.
There are two different types of depreciation an allowance for assets such as the cooktop, and an allowance for capital works, such as the cost of construction.
Its a good idea to talk to a quantity surveyor or other depreciation specialist right from the start, so you make full and correct use of the available depreciation allowances.
Capital gains tax
Capital gains tax (CGT) is the tax charged on capital gains that arise from the disposal of an asset including investment property, but not your place of residence acquired after September 19, 1985. Youre liable for CGT if your capital gains exceed your capital losses in an income year.
The capital gain on an investment property acquired on or after October 1, 1999, and held for at least a year, is taxed at only half the rate otherwise. The capital gain is the profit youve made over and above the cost base the purchase price plus capital expenses such as subsequent renovations.
Making your investment pay
The rent youre charging should have risen over time, and youll be steadily whittling away at the mortgage. Once your rental income exceeds your mortgage repayments youll no longer be negatively geared.
Yes, you'll have to pay more tax because the income you're making is more than your losses but the fact is youre making money, which is why you invested in the first place.
