Investing in property is very rewarding. It’s ability to provide you with tax benefits is quite an appealing incentive to many. A successful property investor will focus on maximising their returns by aiming to increase their income through rent, review the potential capital growth, but also taking advantage of capitalising on the tax incentives provided in property investing.
As the financial year has come to a close, it’s a good time to review your property portfolio and ensure you take advantage on any entitled tax benefits. An investment property can really reduce your tax liabilities so here are some valuable tax benefits to take note of.
Please note this article is general in nature. It does not take note of your personal circumstances. When reviewing your tax planning, we strongly recommend you consult a professional tax accountant or tax agent. This article is to help you become aware of the tax benefits available, but none may be applicable to you.
Tax benefits of an investment property
Tax Depreciation
Depreciation is the lowering in value of your property. This is only relevant to the construction (not land), but also includes the internal fixture and fittings within the property. Over time, due to normal wear and tear, the physical structure itself will lower in value and this is an unavoidable part of property investment. Tax depreciation allows you to take advantage of claiming the depreciation against your income. What’s most appealing with this tax benefit, it’s a non-cash expense. Meaning you don’t need to spend money to claim it.
To learn more about this tax benefit, we have an article that talks more about tax depreciation.
Exemptions on capital gains taxation
This tax benefits technically this only applies to your principal place of residence (although not always). If you have occupied the residence for a period of time and later decide to lease it out as an investment property, you are entitled to some tax exemptions from capital gains tax. In the event you sell the property and achieve a capital gain, you may not be liable to pay tax.
Some people have rented their property out while keeping it as their permanent place of residence. These cases may still provide you with some partial capital gains tax exemptions.
In both cases it’s limited to one property, being your principal place of residence. This cannot be aggregated over your investment property portfolio.
Extracting equity does not trigger a tax liability
Overtime, if you have bought well, your investment property will increase in value. The capital growth will allow you to use the equity to advance your investment property portfolio. This is done by withdrawing funds with a loan against the property. What this means in simple form, if your property goes up in value and you don’t want to sell your property, you can actually access a portion of that money through getting a loan from the bank.
Extracting equity to accumulate your property portfolio is an efficient strategy to escalate your buying opportunities.
Once you sell the investment property at that times, you will be liable for capital gains tax on the growth that you’ve achieved, so that’s something that you need to take into account.
Claiming Interest on the Investment Loan
Most investors use some form of loan to buy property. Some are fortunate to pay cash, but for the majority an investment loan is needed. When buying an investment property with a loan, the interest that you pay on your mortgage is tax deductible. As it’s a cost to generating an income, it has an entitlement to a tax deduction.
Negative Gearing
Negative gearing can serve you well when accumulating an investment property. Essentially any money lost in your investment property, may be able to claim against the tax that you’ve already paid. This means it can offset income earned. This can be quite a tax benefit, but negative gearing can magnify the risk of investment. An investor must have the risk tolerance. The most appropriate person to help you become aware of your risk tolerance is through a licensed financial planner. They have some excellent risk assessment tools to discover your reaction to things that could go wrong and understand your comfort to borrow to invest.,
Please seek advice from an Accountant
With the help of a qualified and licensed accountant, you can make the most of your investment strategy. At Crest Property Investments we work closely with accountants and their clients to acquiring the best possible property that’s within the budget and objectives. We would like to reiterate that the purpose of this article to initiate some ideas when buying an investment property. We strongly recommend you discuss your tax planning with your accountant before proceeding with any investment decision.
While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you want to learn more, please contact us. We welcome the opportunity to assist you.
July 2018
