6 tax benefits of investing in rental properties

Doing your taxes serves as a yearly reminder that you always seem to be handing over your hard-earned money to the government.

And that is plenty of motivation to look at the best ways to take back as much of your money as you can and put it towards your future wealth instead.

Here are six ways that property investment can help you achieve just that.

Negative gearing

This tax strategy is suited for individuals with significant income that they want to be reduced for tax purposes.

It involves investing in a property that runs at a loss. The mortgage repayments, maintenance costs, management fees and other costs exceed the rental income. Therefore, you are putting your own money into the property monthly, which reduces your overall tax liability.

High earners may use this strategy to come down a tax bracket, while still accessing the benefits of long-term capital gain. The assets they invest in will usually be in blue-chip areas with good long-term growth prospects.

It’s not for everyone, as many investors prefer a positive cash flow portfolio, especially if they are average income earners and need the rental returns to cover the costs of the property.

Play the long game

When you sell an investment property for profit, you may be subject to Capital Gains Tax (CGT). However, the government will give you a 50% discount on this if you have held it longer than 12 months. This rule was put in place to encourage investors to provide longer term rental supply and discourage short-term flipping and selling.

So, you might make $100,000 profit from the sale of your investment property and only have to declare $50,000 in taxable income for that year.

Of course, the best way to get a CGT discount is to pay $0…by never selling the property. A positively geared portfolio that pays itself off over the long term will allow you to create an unencumbered wealth portfolio that pays you a passive income.

Depreciation deductions

You can claim depreciation on the building and fixtures of your investment property as tax deductions. This is to compensate you for the wear and tear it suffers over time. There are various rules around this, so it’s good to engage a quantity surveyor, who can prepare a depreciation schedule. They only need to do this once and your accountant can then use the schedule to calculate your deductions for the rest of the time you own the property. And the quantity surveyor’s fee is fully tax deductible.

Claim your interest

Interest payments on loans used to purchase an investment property are generally tax deductible, so the interest that you pay on your mortgage can be used to reduce your income. Depending on your cashflow strategy, this deduction can partially or completely offset the rental income you receive.

Repairs and maintenance

Spent money fixing the air con, or re-tiling a bathroom this year? The good news is that repairs and maintenance on an investment property are tax deductible. This could include painting, plumbing, electrical and various other works.

Improvements, however, are not treated the same as repairs and maintenance and may instead need to be depreciated over time (with limits on how much by each year). If unsure, talk to your accountant or adviser for clarification.

Make the family home deductible?

Often, people will look to use equity in their own home as a deposit for an investment property. It’s a great way to put your greatest asset to use and skip the queue of people trying to save an investment deposit. However, many don’t realise that by doing so, you’ve managed to make a portion of your family home tax deductible.

Say you turn useable equity of $200,000 into a 40 per cent deposit on a $500,000 investment property, not only are you potentially accessing better rates and loan features by having a 60% loan-to-value ratio (LVR), but you are also able to claim tax on part of your wealth that would never otherwise be able to, without having to worry about CGT on that portion of the new asset.

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