Real estate is taxed quite favourably in Australia, with concessions that can be very encouraging for investors from all around the world to buy property here. These benefits are relatively straight-forward and don’t require an extensive knowledge of tax law or accounting to understand and consider.
That being said, tax concessions and benefits should be discussed with your accountant to determine the best approach for your portfolio and considering your financial position. Let’s take a look at some of the tax benefits relevant to property investors in Australia.
When the cost of owning an investment property exceeds the income received from it, the ATO allows investors to offset the loss against their personal income. This is what is known as negative gearing. It is one of the most alluring tax benefits many investors.
Essentially it means that while you may earn a loss on your investment, this loss can be used to reduce the tax you pay on your income. You may be able to deduct expenses such as loan interest and setup costs, in addition to insurance, repairs and property management fees.
There are arguments for and against negative gearing that are too extensive to go into here. Check out our post on everything you need to know about negative gearing for more information.
Negative gearing isn’t suitable for everyone and should be considered with caution. It typically benefits high-income earners who have the capital means to absorb losses over the long term without compromising their financial stability.
It is also a risky strategy considering fluctuating interest rates and property depreciation. Economists have also scorned Negative gearing for driving property prices while doing little to improve housing supply.
Here at Optimal, we always look to find properties that can generate free cash flow as soon as possible. Remember, the goal with property investment is to create tangible wealth.
Depreciation is another tax benefit that property investors in Australia enjoy. Depreciation can be defined as the decrease in the value of a property over time, and this wear and tear can be claimed as a deduction from your overall income.
The ATO defines depreciation rates of different households assets such as carpet, kitchen appliances, air conditioners and hot water systems. There are different rates of deductibles for new and old buildings, so be sure to seek advice from your accountant.
As a landlord you can claim a tax deduction on a number of expenses associated with your investment property (usually only if the property is tenanted or on the market). This includes, but is not limited to:
• Interest on your loan
• Management fees
• Advertising fees
• Repairs and maintenance
• Accounting fees
• Council rates and strata fees
Capital Gains Tax
If you sell your property for a profit – that is, more than than what you bought it for – you have made capital gains, which you have to pay tax on. The capital gain is included in your regular taxable income in the year property was sold, and the tax is determined accordingly.
However, there are concessions for capital gains tax. These include improvements made to the property, buying and selling costs like stamp duty. Legal fees and agent’s commission can also be deducted.
You will receive a 50% discount on capital gains tax for any asset (acquired after 1999) which you have owned for longer than 12 months. Be sure to work closely with your accountant and seek advice about capital gains tax and the relevant concessions.
Tax benefits are a big part of investing in property in Australia, and they should be carefully considered to ensure all aspects of your portfolio are geared towards capital growth. Your investment team is a huge asset when it comes to tax, so be sure to work closely alongside your strategist and accountant – they are there to help you achieve your financial goals!