Tips on Investing in Property
Investing in property can be daunting to the novice. If you’re thinking about investing,but are unsure where to start, we can help.
We can give you advice on investment loans and taxation and help you to develop a wealth creation plan for your future.
What is ‘negative gearing’ of an investment property?
A rental property is ‘negatively geared’ when the amount of deductions, including interest, is greater than the gross rental income received. This ‘loss’ can be claimed as a deduction against other types of income (e.g. wages or business income). Negative gearing can also involve the purchase of other income-producing assets such as shares, units in trusts, businesses etc.
What deductions can you make?
Deductions are expenses incurred in gaining assessable rental income, which are not capital in nature. If the property was not available for rental for the full year, the expenses must be apportioned on a time basis. So if you owned the property for a full 12 months, but rented it to tenants for only 3, you can only claim 25% of the expenses.
Common deductible expenses are:
- Advertising for tenants
- Agent’s commission for managing property
- Borrowing costs
- Interest on loans used to finance rental property
- Lease preparation
- Rates and land tax
- Repairs and maintenance (not structural improvements)
- Secretarial fees (bookkeeping, rent collection, telephone)
- Travel expenses (rent collection and maintenance)
- Capital Allowance (depreciation) on furniture and fittings
- Building write-off allowance (for construction after 18 July 1985)
Other possible deductions include:
- Interest on loans used to buy furniture and fittings for the rental property
- Interest on loans used for capital improvements on rental property
In claiming interest on a loan, the deductibility depends on the purpose of the loan. That is, it must relate to the purchase of the rental property earning the income. Security used to acquire the loan, e.g. personal residence, does not affect the deductibility.
What deductions can’t you make?
The costs of buying and selling your rental property are not allowable as deductions against your rental income. This means you can’t claim stamp duty, conveyancing costs, advertising expenses or the purchase cost of the property. The cost of ‘repairs’ to a newly acquired property are also not allowable – even if they are needed to make it liveable for tenants.
However, if you acquired the property after 19 September 1985, these costs are taken into account when calculating any capital gains.
Capital Gains Tax
If a rental property is sold for more than it cost, and was purchased after 19 September 1985, capital gains tax may be payable. If you own the property for more than 12 months, concessions are available on that gain. Details of the concession now vary depending on when the property was acquired and sold. If a capital loss is made, that loss can be offset against any capital gains, either now or in the future, but cannot be used to reduce any other income.
We recommend that the suitability of this type of investment for your particular circumstances be discussed with a Beyond Bank Wealth Management Financial Planner.
Disclaimer: It is not our intention that this information be used as a primary source of users information but as an adjunct to their own resources and understandings. Any representation or statement expressed or otherwise implied above is made in good faith but on the basis that we do not give any warrant of accuracy or reliability or accept any responsibility or liability for any errors or omissions.