By Michael Beresford
A lot of property investors ask us about the best way to maximise their tax benefits. In terms of what you can claim, the best person to talk to is your accountant but as a general rule, every expense associated with an investment property is tax deductable. This excludes stamp duty and legal costs paid when purchasing the property. So your conveyancer’s fee wouldn’t be tax deductable.
Now, we all pay a lot of tax and want to get as much of it back in our pockets as possible; there are two key ways to do it. The first is through depreciation. We’ve all heard the old line that a car loses $5000 in value the moment it is driven out of the showroom, which isn’t exactly correct but the point is that assets drop in value over time and houses aren’t any different. That drop in value over time is what we call depreciation.
If you spend $450,000 on a property which was built before July 1985, you won’t receive any of the tax benefits associated with depreciation. However, if you buy a brand new property for the same amount, your depreciation in going to be about $10,000 in the first year and then it will drop slightly over time.
Let’s say you earn $80,000 a year and pay a 30 per cent marginal tax rate. Buying a new property could see an extra $3000 a year in your back pocket, in terms of tax benefit. This equates to $60 a week which, if you choose the right kind of property, is all it will cost you to hold another property! If you can hold a second property with the same net cash flow, then your wealth creation’s really going places.
Most people are unaware of a really great tool which allows you to have your tax benefit fed to you throughout the year. It is called a tax variation form or a PAYG withholding form. Let’s say each year you received $12,000 tax back for costs associated with your property portfolio. The traditional way of claiming this is in a lump sum from the ATO, once your tax return’s done.
A far better way of doing it is with a tax variation form. It is very easy for you or your accountant to set up. Your payroll department will be notified of the new tax rate. Let’s keep it simple and say you were paid on a monthly basis. The $12,000 tax benefit would be apportioned into an extra $1000 in your pocket each month.
So you can get back the overall holding costs associated with your property, maximise your return and should have cash flow left over for more properties or a better lifestyle.
So buy new to maximise depreciation and get your tax variation form in place, so you can get that money back throughout the year.
Hopefully this blog has helped give you clarity, however if you’d like to take a more in depth look at your situation, don’t hesitate to get in contact with the team, via the contact button below.