The Relationship Between Tax And Owning An Investment Property?

Do you pay more income tax than you would like to? Most likely your answer to this question is ‘Yes’ as most people would like to pay as little tax as possible. More than likely, if you are interested in property as an investment vehicle, you would have heard somewhere along road that owning an investment property has tax deduction benefits. The simple answer is ‘Yes it does’. However, be aware that the tax benefits differ between properties and circumstances. For an outline of all deduction you can claim visit the ATO site here.

1. Sharing the Ownership

The tax benefits of owning an investment property start right from when you decide to purchase the property. If there is only 1 person or party involved in the purchase then it’s a straight 100% ownership. However, if the property is being purchased by more than 1 person, the ownership percentage can be varied to create a tax saving if applicable.

For example: If Mr and Mrs Smith went to purchase property A, and their incomes were $60,000 and $72,000 respectively, there is no tax advantage to be gained by adjusting the ownership from 50/50 as both incomes are in the same tax bracket.  However, If Mrs Smiths’ income was over $80,000 then it would be beneficial to place a higher percentage of ownership in her name as she is in a higher income tax bracket than Mr Smith and the couple would increase their tax savings.

2. Property Expenses

To assist you further in reducing your tax, any expenses incurred to complete the purchase, any holding costs, or any running costs can be claimed as a tax deduction. The actual purchase price of the property and any subsequent principal loan repayments (if applicable) cannot be claimed, however, bank interest, legal fees, and setup fees can be claimed. Deductions can also be claimed for property management fees, rates – including water rates, and any property maintenance costs.

Be aware that rental income will be added to the property owner's income. Therefore if rental income exceeds property expenses, then there is no tax deduction. This is definitely the case in a positively geared property – where the owner's make a profit rather than a tax deductible loss on the property.

Here's some more tips from the ATO in regards to claiming property expenses as deductions:

3. To Buy New or Second-hand?

There is a definite tax advantage to purchasing a new property over an older property for investment purposes. The advantage comes from a process known as depreciation – a reduction in an asset over time, due in particular to wear and tear. The depreciation that can be claimed on a new property in comparison to an older property of the same value is generally greater.

In regards to property, depreciation is divided into two categories – capital depreciation and fixtures & fittings. Depreciation is at its highest when a property is brand new as its effective life is at its longest as wear and tear is obsolete. Using the diminishing value method, depreciation decreases over the life of a property – generally set as 40 years. Therefore, a greater tax deduction is claimable on a brand new property as you can claim capital depreciation and the maximum allowable amounts for fixtures and fitting.

On a second-hand property, depending on the age of course, only capital depreciation is available as the effective life has expired on most if not all fixtures and fittings. This decreases the tax deduction available for this property. If your goal of investing in property is to construct a property portfolio and benefit from tax savings, then a newer property would best meet these requirements.

Further Help To Make Sure You Maximise Your Tax Return! 

There are a variety of experts and companies out there who can provide depreciation reports for your property and give the most accurate and up-to-date values and effective lives for your fixtures and fittings. They can also advise on the best depreciation method to use – diminishing value or prime cost. If you own an investment property, your Accountant will require one of these reports for your annual tax return.

There is a definite tax advantage to owning an investment property . If you would like to see the types of properties we have available that may suit your requirements or wish to have a no obligation free consultation to discuss your situation further, please call our office on 1300 212 949 or email admin@investmentproperty.com.au.

We are always happy to assist you with your enquiries.