We hope you find these articles helpful on your search for an investment property.

Tax and Property Investments

Having a good understanding of the tax issues involved in property investment is vital if you are planning to build a solid investment portfolio. The knowledge will also give you a true idea of how much your investment will cost you each year.

Expenses Checklist

To get a realistic overview of what your investment will cost once you have dealt with the upfront costs – loan application fee, mortgage insurance, solicitor or conveyancer fees, pre-purchase inspection and survey report, stamp duty - add up the following:

  • Monthly loan repayments
  • Strata fees (if property is a strata unit)
  • Council rates
  • Management Fees (if letting the property via an agency)
  • Maintenance costs
  • Property taxes (land and capital gains tax)

Negative Gearing

An investment property is ‘negatively geared’ when the mortgage interest and other tax deductions - such as management fees are greater than the rental income. This results in a net loss that may be offset against your other income (such as your salary), which then lowers your overall tax bill. In this way, the tax man - as well as your tenants - help you to pay for your investment property. Hopefully your property is steadily appreciating in value in the meantime. Most people feel more comfortable 'gearing'; or borrowing to pay for an investment property or properties than borrowing to purchase shares, which are generally most volatile.

Depreciation

One of the key elements of an investment properties effectiveness is the ability to make it a tax-effective investment strategy by depreciating items. In order to get all of the deductions you are entitled to, it is recommended that you call on the help of an expert.

Specialist companies can inspect your property and estimate the cost of the buildings capital works, along with the value of fixtures and fittings.

The main items you can depreciate include the building itself, floor coverings (carpet), furniture and fittings, appliances (eg: dishwasher or clothes dryer), air conditioning, hot-water system and fire sprinklers.

Other Property Taxes

As well as council and water rates, investors can expect to pay capital gains tax and land tax.

Capital gains tax applies to investment properties purchased after 19 September 1985 and sold after a period of 12 months. Talk with your accountant when structuring your investment to make sure you are eligible for capital gains tax concessions.

Land tax is a state-based tax that applies to the Australian states and territories (except the Northern Territory). It is annual tax based on land value only and is tax-deductible in relation to any income-producing property, including investment property. Land tax rates and thresholds vary across the country. For more details on the taxation rate in your state, check your local Office of State Revenue.

GST

Property investors are unable to claim GST credits for general property expenses that incur GST, such as management fees and repairs and maintenance, as GST does not apply to rental income. GST does not apply to interest and mortgage repayments, bank charges and fees and council and water rates.

Structuring Strategies

One common dilemma for investors is whether they should hold their investment property in a family trust or company, or in their own name, their partners name or jointly. If the structure of your investment is incorrect or inefficient, you could literally throw away thousands of dollars each year.

The solution depends on the individual circumstances of each person. Discussing the situation with your accountant is a step in the right direction. Your accountant will advise you after covering off a number of factors, including:

  • The marginal tax rates incurred by yourself and your partner.
  • Your estimated future incomes.
  • Whether you or your partner is exposed to a business risk.
  • Whether either party is currently liable for land tax.
  • If this is the second or third property investment, what the comparative capital gain over the medium term will be.

Insurance

It is essential that you have adequate insurance for your investment property. That way you are covered for any unforeseen events, such as job loss or illness, damage to your property or rental vacancy.

There are several types of insurance you should consider:

Rent Cover or Landlord Insurance - This will protect you if tenants default on payment or if the property cannot be rented due to damage. You will also be covered for malicious damage, and some policies will cover normal vacancy.

Income Protection Insurance - Income protection is advisable to cover the cash-flow risks associated with your investment. It provides a monthly income if sickness or injury prevent you from working.

Building Insurance - This will be necessary before you settle on your investment loan.

Contents Insurance - If your investment property is to be rented out with furniture, the contents insurance will cover any damage and replacement costs.

This information has been prepared by Smartline Home Loans. This is only a general guide - not a substitute for professional advice. Santo Correnti Homes Pty Ltd does not guarantee the accuracy, reliability, or completeness of any information on this page, and will not be liable for any loss or damage suffered as a result of anyone's relying on this information. We recommend you obtain advice from your own financial, taxation or legal advisor before entering into financial transactions.