In property, just like in business, having the right strategy is key. Would you expect a business without a strategic long-term plan to succeed? Most probably not, yet so many Australians continue to enter the property market without a sound, clear and proven strategy for success. Effectively tapping into your tax can be a key part of a successful property portfolio. Let me explain how.
Along with desire, strategy can be the difference between a successful and a failing investment portfolio. Selecting the right properties, the right markets, and even the right tenants are all important, but all this can be negated by a poorly set up and managed strategy. How you manage your tax is a great example.
Believe it or not, tapping into your tax to help you buy investment properties is a ‘Win Win’ for both you, and the Australian government. You get to use your tax rather than your ‘take home after tax income’ to service a large part of the holding costs, PLUS the Australian government get private investors to fund and help supply housing in Australia.
As I’m sure you know, negative gearing is the tax benefit that accrues when the income from an investment property falls short of covering the outlays on that investment. And despite the fact that the Australian Taxation Office records of 2013-14 tell us that out of 2.9 million investors, 1.755 million of them use negative gearing, in my experience most people use negative gearing in a very negative way. This is generally due to not having the proper measures in place to ensure their strategy allows for the most effective use of the tax benefits on offer.
For more than a decade now I have been assisting regular Australians discover how they can get the most out of their investing dollar. My team and I are passionate about helping people either set up a stable and high returning property portfolio, or provide strategy updates to maximise an existing portfolio. To find out more about how you could have a private, one-on-one Property Strategy Session with one of my property strategists fill in your details to the right.
The essence of negative gearing is that you will be experiencing either a ‘paper loss’ or a negative income from your property each week. The difference between your outlays and your income is tax deductible. It can then be offset against your personal income (including salary) to reduce your taxable income. When utilised effectively most of the negative gearing benefit is made available via ‘paper losses’.
Often the missing link in many poorly planned property portfolios is the ability to capitalise on ‘paper losses’ made available thanks to depreciation. Depreciation is encouraged by the Tax Department and allows you to claim a percentage of the declining value of fixtures and fittings, over a number of years of wear and tear, plus the depreciation of the building itself if it was built after July 1985 and used to produce income.
Elements of this last point are currently under review due to the most recent budget changes, whereby investors would only be able to claim depreciation on fixtures and fittings on either brand new properties, or if you actually bought the items yourself as opposed to just acquiring them at the time of buying a non-new property.
When it comes to new homes you can also separate the fixtures and fittings from the building structure and depreciate these on an accelerated basis. New buildings can offer depreciation that adds up to thousands of dollars a year, significantly reducing your taxable income.
Knowing these smaller details can be a game changer for your property portfolio over time, and if you find yourself paying a lot of tax then a strategy that utilises legal tax breaks may make sense for you.