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  • Writer's pictureMichael Smith

Investment Property Taxes and Negative Gearing

Every tax year, millions of Australians spend countless hours looking for concessions and deductions that might improve their financial standing.

When it comes to investment property, investors are afforded a number of tax breaks that add to the appeal of this asset class. As with any tax deduction, however, you need to make sure you keep good records of all your expenses, including receipts.

The Growthfront team can put you in touch with one of our trusted accounting partners so you can discuss your personal financial circumstances. But in the meantime, this is what you should know about investment property taxes and negative gearing,

What Can I Claim as a Tax Deduction?

There are a number of expenses that property investors may claim as a deduction to reduce their overall taxable income, however, it is worth noting that the property must be available for rent, or currently being let, in order to claim these items. Some of the deductions include:

  • Accounting and/or advisory fees

  • Property management fees and rental advertising expenses

  • Council and utility rates

  • Body corporate fees and/or strata fees (where applicable)

  • Land tax

  • Interest payments

  • Loan/borrowing costs (e.e. LMI, loan establishment fee, valuation fee)

  • Maintenance, repairs, and cleaning expenses

  • Pest and building inspections

  • Insurance premiums

  • Utilities (where paid in full by the landlord)

  • Depreciation (fittings and fixtures, building)

Each of the above items will be treated as tax-deductible over a certain timeframe, and in the case of depreciation, the methods to calculate depreciation of a particular asset may be confusing or tricky to calculate. Make sure you speak to a licensed tax professional.

While you might be inclined to view stamp duty as well as legal or conveyancing fees at the time of purchasing the property as tax deductions, they are not tax deductible. These expenses are factored into the purchase price of the property and instead impact your capital gains tax when you sell the property.

Understanding Capital Gains Tax

Unlike the primary home, an investment property is subject to capital gains tax (CGT). This is a type of tax based on the amount of money you might make from the capital growth of the property. That is, the difference between how much you paid for the property, including stamp duty and other upfront costs like legal fees, and the amount you receive when selling the property.

Capital gains tax does not apply if you purchased your investment property prior to September, 1985. If you have purchased your investment property any time since October, 1999, individuals may be eligible for a 50% capital gains discount if the property is held for at least 12 months. What’s more, CGT calculations are based on the contract date you buy or sell the property, not the settlement date.

Because taxation can be quite complex, and your personal tax circumstances are influenced by your financial position, always speak to an accountant or licensed tax professional.

What is Negative Gearing?

By far the most well-known tax concession associated with investment properties is a practice called negative gearing. At a basic level, gearing is borrowing to invest in an asset. So if you have previously taken out a loan to buy something, you have engaged in gearing.

As part of taking out a loan, you will pay interest accordingly. Like other expenses, this interest is tax deductible where the property is let, or available for rent. You will also have other property-related costs on an ongoing basis.

If the ongoing costs associated with the property exceed the rent you generate from renting the property, the property is negatively geared. As a result, you incur a taxable loss that you can use to offset against your salary and other earnings to reduce your taxable income.

Where an Individual knows in advance that their investment property will be negatively geared, they may contact the Australian Taxation Office to reduce PAYG withholding tax in order to boost their cash flow.

These benefits underpin why negative gearing often becomes an important point to consider when determining your investment strategy and goals.

What are the Risks of Negative Gearing?

Negative gearing is a common sight across the local property market, but that doesn’t necessarily mean it comes without risk. After all, a negatively geared property is an unprofitable property, and you are effectively ‘burning’ cash each month as rental income falls short of covering expenses.

In addition, you need to take into consideration the things that can potentially go wrong when you own an investment property. By this we mean, it’s not all smooth sailing. There will be periods where your property is vacant and there is no rental income. Furthermore, if interest rates rise quickly, monthly repayments for variable rate loans may significantly increase. There is also the risk that a property downturn reduces the value of your investment.

With each of these risks, your losses could be amplified. Again, that may give rise to certain tax benefits, but at the end of the day, a loss is a loss. A ‘positively geared’ property, which earns more in rental income than it costs to own and manage, should be viewed as a more desirable outcome, even though the profit is taxable.

Nonetheless, with the appeal of negative gearing, you may want to consider some of the ways you can reduce the prospect of your losses blowing out. The easiest way to do this is to buy an investment property that appeals to a broad range of tenants, which will help lower your vacancy rate.

You should also have some savings set aside and take out appropriate insurance cover to safeguard you from any unforeseen circumstances that could otherwise prove costly.

The choice to invest in a negatively geared property is one the Growthfront team can discuss with you in detail. It’s important you are aware of the risks associated with negative gearing, rather than assume it is the most appropriate option because of how common it is.


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