Investment property tax implications & benefits

Reduce your tax bill with this popular investment strategy.

Negative gearing occurs when the annual expenses of owning a rental property exceed the income it generates. Imagine you buy an investment property for $500,000 and rent it out for $450 per week. Your annual rental income is $23,400. However, your expenses for the property, including mortgage interest, council rates, and property management fees, total $28,000 per year. This means you have a rental loss of $4,600.

With negative gearing , you can deduct this loss from your other income, such as your salary or wages. This reduces your taxable income and can result in a lower tax bill.

Simple example: Let's say your annual income is $80,000. By deducting the $4,600 loss from your rental property, your taxable income becomes $75,400. This could potentially save you thousands of dollars in tax.

Important note: Negative gearing is a complex strategy and it's crucial to seek professional advice from a financial advisor or accountant before making any decisions.

Claim deductions for wear and tear on your investment property.

Think of depreciation as wear and tear on your investment property. Over time, things like carpets, appliances, and even the building itself lose value. You can claim a deduction for this decline in value, which can reduce your taxable income and your tax bill.

Simple example: You purchase a brand new investment property for $600,000. The construction cost of the apartment is $400,000. You can claim a capital works deduction of 2.5% of the construction cost each year for 40 years. This means you can deduct $10,000 per year (2.5% of $400,000) from your taxable income, reducing your tax bill.

Important note: Depreciation can be a valuable tax benefit for property investors. It's recommended to consult with a qualified quantity surveyor to get a detailed depreciation schedule for your property.

Understand the tax implications of selling your investment property.

Capital Gains Tax (CGT) is the tax you pay on the profit you make when you sell an asset, like an investment property.

Simple example: You buy a property for $600,000 and later sell it for $750,000. Your capital gain is $150,000. You will need to pay CGT on this profit.

Important note: There are ways to reduce your CGT liability, such as holding the property for longer than 12 months and utilising any applicable discounts or exemptions.

You can find more details about the Capital Gains Tax (CGT) on the ATO website or talk to your tax specialist or accountant to understand your CGT obligations.