Advanced Negative Gearing and Depreciation
Our first article was a bit of a read! This article will be in-depth as well, so do not read on if you are faint-hearted, reading about tax is not always exhilarating!
To recap, negative gearing is where your investment property is making a tax loss. This doesn’t mean you aren’t receiving payments from the property manager; it just means that for tax purposes it is making a loss. The benefit of negative gearing is that any loss you make, can generally be claimed as a tax deduction in the name of the entity that owns the property. For example, an investment property makes a $5,000 tax loss in the financial year, and the owner is currently being taxed at 30%. If we claim this $5,000 loss as a deduction, the owner will save $1,500 in tax ($5,000 x $1,500).
Remember what we said in the first article though, you are still making an overall loss of $3,500 (the $5,000 loss minus the $1,500 in tax savings). All we are doing here is making the loss tax effective, but it is still a loss. However, what if $8,000 of the rental property expenses were depreciation (i.e., an intangible loss that does not actually cost you tangible money)? Well, that would mean the property is paying you $3,000 a year (-$5000 + $8000), which is nearly $60 a week in your pocket!
Now, a $8,000 depreciation claim might seem out of reach for the washing machine you just had installed, but we are talking about a property depreciation report, issued by a firm like BMT. A tax depreciation surveyor will assess your entire property (the building and the improvements) and prepare a depreciation report on the property that you can claim at tax time! Better yet, it will generally cost less than $1,000, which you will likely save over and above in the first year, and we can actually claim this expense as well.
You see, the property is making what you would consider a profit of $3,000 a year, but because of the depreciation report, we are actually claiming a $5000 in deduction (tax loss). This means that not only do you not have to pay tax on the $3000 that you are being paid each year, but you also get to claim an additional expense of $5,000 a year against your other income!
Sound too good to be true? Well, there is a catch, and this is another benefit of having an accountant involved. If you sell an investment property (or any other asset) you are generally subject to capital gains tax. Many of you may be put off by the term, but contrary to popular belief, it is not strictly a tax, but rather a way of calculating tax (and usually a beneficial one at that). We will cover the implications of it in the basic and advance capital gains tax articles, so please make sure you read them!
This is a post by a private company, so we do have to mention that we offer free initial consultations for any Gold Coast, Australia property investors that would like to know more about our property management and tax services. Want just a tax chat? Visit www.cdgaccounting.com.au.
Outside of the Gold Coast? We are also taking expressions of interest from across the country for property management, so please feel free to book in a chat as well! We believe everyone should have access to our advice!
Note, the above is not intended as advice and is purely general in nature, every circumstance is different and specific advice should be sought in all individual situations, see our Disclaimer page for more.