Dandenong Accountant for Investment Property

Investment in the property market is a very common way of accumulating wealth among Dandenong families. While every individual will have different goals, “negative gearing” is a term that attracts many investors in the real estate market. Negative gearing occurs when the cost of owning a rental property is in excess of the income it generates each year. This taxable loss thus created, can normally be offset against other income including your wages or salary. This will lead to a reduction of your taxable income and consequently your tax liability.
Let’s say that you own a rental property generating a rental income of $20,000 each year. The costs of holding the property, including mortgage interest, council rate, and depreciation come to $25,000. This gives you a taxable loss of $5,000, which you can use to reduce your taxable income from other sources like salary and wages. If your marginal rate of tax is 46.5 %, you will be saving a tax of $2,325.Negative gearing works better for the taxpayer with a higher marginal rate of tax.

If you know in advance that your investment will record a loss over the financial year, you can apply to the Tax Office to reduce the amount of tax taken out of your salary by your employer. This is called PAYG Withholding Variation and it can contribute to your monthly cash flow budget.

What expenses are deductible?

The basic principle of tax in Australia is that costs necessarily incurred in earning income are generally tax deductible. Accordingly, you can claim any expenses associated with the rental property.

There are two types of costs associated with owning an investment property.

• Cash costs include interest payments, bank fees, maintenance costs, insurance premiums, and property management fees.
• The non-cash cost is depreciation. If you add the amount of cash and non-cash costs and they exceed the rental income, then there is a net rental loss which may be able to be claimed against your other taxable income.

The calculation of depreciable items is specialized and should always be carried out by a quantity surveyor.

Below are examples of costs that can be claimed as deductions for the rental properties:

• Interest on loans (including interest prepaid up to 12 months in advance)
• Bank Charges
• Council Rates
• Body Corporate Fees
• Advertising cost
• Borrowing Expenses (For example, stamp duty and legal fees on a mortgage)
• Building depreciation (depending on the date of construction)
• Cleaning Costs
• Depreciation of fixtures and fittings (light fittings, carpets, etc)
• Insurance expenses
• Land Tax
• Pest Control expenses
• Property Agent’s commission
• Repairs and Maintenance (excluding improvements that are treated as capital)
• Telephone, postage, and stationery
• Traveling Expenses associated with the inspection of rental property
• Water Charges
• Gardening expenses

People often miss out on maximizing their negative gearing benefits by omitting deductions for items such as travel costs for the inspection of the property and depreciation of the building and/or fixtures and fittings.

Choosing a right investment property

Careful selection of your investment property is paramount to ensure that you are maximizing the benefit from your investment property. While there are many factors to be considered, one of them is new or existing. The new property allows you to maximize your tax advantages mainly because you can claim higher depreciation in the new property. The benefit of depreciation in existing property depends upon the year of construction and associated costs. It is important to invest in areas of capital growth potential. In fact, you should be using the tool of negative gearing to maximize your return from capital growth.

At Lotus Smart, we have advanced tools and many years of expertise to project the cash flow associated with the investment property that you are planning to buy. This will give you an estimate of how much will be out-of-pocket expenses to yourself. We can also assist you to apply for the PAYG withholding variation so that your employer deducts less tax and you will be getting the benefit of negative gearing well in advance. Speak to us for more details as the real benefit of negative gearing depends upon your personal financial circumstance.