We invest in property to make money; making a loss is neither an objective nor an ideal. Fortunately, Australian tax law allows investors to deduct any losses incurred from the operation of an investment property from their taxable income. This makes it an awful lot easier to invest in the property market.
This is the principal benefit of a negative gearing strategy and may be responsible for the periodic increase in rental housing supply, which can help to reduce rental prices.
Investors with a capital growth strategy don’t necessarily expect to make money on net rental income, especially in a rising interest rate market. They focus predominantly on long-term capital gain as a primary driver for their portfolio, acquiring properties that will increase to a point where a healthy profit can be made from its sale.
The game for many investors is to limit their losses until the time comes for them to sell, and negative gearing is a good way to do that.
Essentially, negative gearing works if the money an investor makes from a property’s capital growth is greater than the loss they make from the rental shortfall.
Rarely a day goes by without an investor or the media mentioning negative gearing.
But what does it really mean?
There are two primary, legitimate tax levers for property investors to deploy for tax minimization; these are negative gearing and depreciation.
Negative gearing can be contentious and not primarily an investment strategy. It may be viewed as a benefit of investing and a mark of a financially astute accountant, as well as a by-product of well-selected properties that provide long-term capital appreciation in the first instance, with rental yield as a secondary consideration.
The investment must first address vision and goals, as well as key macro and micro economic drivers to identify the best markets and properties for growth and rental yield, with minimized risk.
For negative gearing to work, you need:
(1) a reliable cash flow to cover pre-tax borrowing costs and earn enough income to meet your loan repayments and
(2) to be in a position to hold onto the property for long enough for its value to increase to a point whereby the profit made on its sale is greater than the rental shortfall incurred during ownership.
Before deciding on which gearing strategy works best for you, we recommend speaking to a financial advisor so that you better understand the potential pitfalls and rewards.
Depreciation is one of the best tax breaks available to property investors, but you’ll need a depreciation schedule in order to claim it.
A good report, provided by a qualified quantity surveyor, will break down your plant and equipment depreciation by two methods: the diminishing value method and the prime cost method, which give you different options for claiming depreciation on your assets depending on your needs.
There are two types of depreciation deductions available to property investors:
(1) Depreciation on building allowance – (capital works)
(2) Depreciation of plant and equipment
Many investors miss vital depreciation opportunities and lose thousands. You might be losing easy cash because of one of these common misconceptions:
YOUR PROPERTY IS TOO OLD
Any investment property built after 1987 can attract deductions
RENOVATIONS COMPLETED BY A PREVIOUS OWNER AREN’T CLAIMABLE
They are claimable! the entitlement to claim depreciation on these improvements is inherent in the purchase of the property
YOUR PROPERTY IS TOO SMALL
Small apartments have many depreciable items, including common areas like pools, gyms, and entertaining spaces
YOU HAVE LOST TIME NOT HAVING DONE A SCHEDULE SOONER
Good news! You can claim for backdated depreciation. It’s never too late.
YOU LEAVE DEPRECIATION CALCULATIONS TO YOUR ACCOUNTANT
To ensure all the depreciable Items in your property are accounted for you are advised to engage a registered quantity surveyor and an experienced property valuer
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