As the first quarter of the 2021 tax year has just finished it is now a good time to do some tax planning. As long as your situation is suitable, one way to increase your wealth and benefit from tax regulation is to purchase an investment property. I suggest you speak to your financial planner and discuss whether you would benefit from this wealth creation strategy.
In this blog I will explain some of the issues involved from a tax perspective in the way of some Q & A’s which will hopefully shed some light on this complicated subject matter.
If you are carrying on a business or thinking of carrying on a business of residential property rental, then speak to me, as these questions do not cover a business scenario.
So let’s go:
What is a positively geared property?
This is when the rental income exceeds the rental expenses. This net rental profit is added to your other income and taxed at normal rates.
What is a negatively geared property?
This is when a loan is used to buy a property and the rental income is less than the rental expenses.
What is the benefit of having a negatively geared property?
You can deduct the rental loss against other income of yours and therefore receive a refund of PAYG paid from your salary.
What is the downside of a negatively geared property?
You might have to pay expenses out of your own pocket.
What are some of the expenses I can deduct against rental Income?
These are some of the expenses you can claim against your rental income:
Advertising, council rates, insurance, interest on loans, property agent fees, repairs & maintenance, water, land tax, and depreciation.
Is there any situation when I can have a negatively geared property and do not have to pay out of pocket expenses?
This is a situation that all property investors would like to be in, by receiving the benefits of reducing your taxable income and not having to incur out of pocket payments. This would occur if the rental loss is caused by a depreciation expense.
What is a depreciation expense?
This is a non-cash deduction. i.e. you do not have to pay any money to claim this expense but rather it is a tax allowable reduction of the value of an asset over a few years.
There are two types of depreciation expenses that could possibly be claimed:
- Div 40 – This applies to Plant & Equipment
- Div 43 – Capital works deductions
How does Div 40 work?
Different plant and equipment connected to the property are written off over different periods of time. Only new depreciating assets can be claimed if a property was bought after 9 May 2017. For e.g. a dishwasher can be claimed over 8 years and solar panels over 20 years.
Who can claim this Div 40?
Div 40 can be claimed on all applicable assets if the property was bought prior to 9 May 2017. If bought after this date, then only depreciation on new assets can be claimed.
How does Div 43 work?
This allows a building to be written off over 25 or 40 years.
Who can claim this Div 43?
Original Owners and subsequent owners. This claim has not been limited as for Div 40.
What are some of the most recent changes to tax law affecting residential properties?
- The holding costs for vacant land after 1 July 2019 are denied.
- Second-hand asset depreciation is denied if the property was acquired after the 9th of May 2017.
These laws are extremely complicated so please speak to Accolade Accounting for information specific to your situation.
Here is a simple example to show you how a rental loss can result in a refund of income tax.
John received a rental income of $13 600 and had out-of-pocket expenses of $12 000 including interest on a loan. He also had a DIV 43 depreciation claim of $5 000.
He received a salary of $150 000 and his employer paid PAYG of $45 997.
The net rental loss is $3 400
His taxable income is reduced to $146 600 ($150 000 – $ 3 400)
John will receive a tax refund of $ 1 326
Should you have any questions about purchasing or selling or renting an investment property, please give Accolade Accounting a call 08 6263 4466 or send me an email to firstname.lastname@example.org