Did you know that there are tax benefits to owning real estate? As a property investor in Australia, you'll no doubt want to maximise your profit and minimise your costs.
Of course, you'll need to do this within the bounds of the law. Having an understanding of applicable tax exemptions is essential in order to successfully grow your wealth.
Immediate deductions
You can claim deductions for rental property expenses each tax year. Keep in mind that the dwelling must be tenanted or available to be rented, according to the Australian Taxation Office (ATO).
Some expenses are immediately deductible. These include:
- Council rates
- Building, contents and public liability insurance
- Interest expenses
- Repairs
- Maintenance
- Water charges
- Advertising to secure tenants
- Cleaning
Remember, you must incur these expenses - you can't claim them if your tenant pays them.
Other deductions
Other expenses are deductible over a longer period of time. For instance, borrowing expenses over $100 are deductible. But rather than making an immediate deduction, you spread the cost over the lesser of the period of the loan or five years.
You can also claim deductions for depreciating assets, using the diminishing cost method or the prime cost method.
According to the ATO, such assets include ovens, clothes dryers and ceiling fans. But there is an exception - if a single asset was $300 or less, you will claim a deduction immediately, rather than spreading it over a period of time.
Negative gearing
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Cash-flow positive properties are favoured by some investors, while other will go down the road of negative gearing.
Perhaps you've got a portfolio with a mix of positively and negatively geared properties, enabling you to offset losses and gains.
If your property's rental expenses outweigh its income, then it's negatively geared. However, you can offset this loss against your income, reducing your total taxable income.
Given it costs more to run the property than what you earn from it, this strategy counts on solid capital growth to make it worthwhile.