Own an investment property? Want to own an investment property? Heard of negative gearing? Owning an investment property is a simple process, but how often do you speak to a property manager about the structure of your ownership and how it can save you money on tax? The conversation always ends in ‘you should talk to an accountant’. Well, we are a property management company run through a Chartered Accounting firm that includes these conversations in our service, so look no further.
All that aside, have you ever asked the below questions:
- Who should own the property?
- Is negative gearing worth it?
- What about capital gains tax?
- What if I live in part of the property?
- Is there a difference between holiday letting (eg. Air BnB) or long-term letting?
- How are commercial and residential properties different?
- Is it too late for tax planning if I already sold the property?
This first post will only cover some of these to put you on the right track, starting with negative gearing. Negative gearing essentially means that your investment property is making a tax loss. The key word here is tax. You could actually be receiving $100 a week in positive cash flow (deposits into your account), but the property could still be making a tax loss.
This is because there are certain specific provisions in tax law that allow for non-cash expenses, depreciation being a specific example. Depreciation is strictly a reduction in value of an asset (asset cost $1000, now we say it is only worth $900, depreciation expense is $100). At no point have you spent $100, but you are able to claim the expense regardless.
From our experience, too often people will simply try to increase their direct expenditure to save money on tax, but this is not a strategy. For example, if you are currently being taxed at 30%, and you spend $1000 (and claim it as a deduction), you will only save $300 in tax ($1000 x 30%). You will still be out of pocket $700! Simply put, you should only ever spend money that you need to spend, you should never spend money just for the tax deduction, it should be only a secondary consideration (ignore all those crazy EOFY sales advertisements!).
The tricky part with property is that you don’t buy it just to minimise tax, but generally with the intention of making a future gain when you sell the property, so making a loss leading up to the sale is OK, so long as it sells for what you are expecting it to.
This is why you need an accountant on call when dealing with property. If you really want to get ahead of the pack, it is not good enough to simply have your property managed, but you must have proactive planning to make sure you are making the most out of the investment. Even accounting firms usually fail here. Typically, you receive a statement from your property agent, email it onto your accountant, and that’s all that happens for the year. Does anyone really look at the statement and tell you your position? We do. If we see any tax issues or opportunities, you will be the first to know, after all, why else would you pay a property agent?
We offer a free initial consultation on our website, so if you want to talk tax planning and property management, book in a time now.
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.