Tax and investment properties
Saturday, November 11th, 2006So you want to buy an investment property, and want to know the best way to do it from a taxation point of view.
Here are some pointers.
A disclaimer first. Just because these work from a taxation point of view doesn’t mean they’re optimal. In fact, as you will see, sometimes they are the opposite. You must take other factors into consideration, particularly your own circumstances.
Don’t buy an investment property just for the tax benefits. It’s the wrong reason to invest.
Negative gearing
I’m not a big fan of negative gearing. It has its place, but the sleep factor is more important.
Negative gearing is paying more in repayments than you make from an investment. For example, if your investment propery repayments are $2,000 per month, but the tenant only pays $1,200, you are negatively geared to the tune of $800. You can claim some of that back (the interest portion) in tax.
It is more beneficial to those on a higher tax rate. The lower your tax rate, the less benefit you gain.
Timing of repairs
Conventional wisdom has you buy a house, do it up, and then lease it out.
While this will probably get you better tenants and a higher rental return, taxation-wise you are better to put tentants in immediately and paint the house twelve months later.
You cannot claim work you do preparing a property for rental. You can, however, claim repainting and repairs once the property has been let (a reasonable time).
Know the difference between repairs and maintenance
Repairs are tax deductible, replacement is not.
Repairing tiles on a leaking roof is tax deductible. Replacing those same tiles because the roof is getting old is not.
Travel to inspect property
It is reasonable to inspect your property twice a year, and you can claim travel to do this. If you visit it more frequently than this you must have a good reason.
Keep records of dates, costs and distance.
Remember that what works well from a tax point of view is not always best for you
Tax is a complex subject. The examples given here are simplified. They have to be. People write whole books about each of these subjects.
Remember, though, opting for the tax advantage is not always the best thing to do.