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How do I reduce taxes on a rental investment property?

While property investment can increase your cash flow, it also comes with a new set of tax obligations. Remember that any rental income you receive forms part of your assessable taxable income.

However, there are many ways to reduce taxes on your rental investment property and minimise your tax bill. In this article, we’ll go through some of them so that you don’t pay more tax than you need to.

Negatively gear your property

Negative gearing is a term that you’ll get very familiar with as you start your property investment journey. It refers to when your mortgage repayments and property expenses outweigh your rental income. While this sounds like a negative thing, it can be used to an investor’s advantage.

Depending on your investment goals, this could actually be a way to minimise your taxes. The losses you make with a negatively geared property are tax deductible.

On the other hand, with a positively geared property, your rental income will exceed any expenses. This gives you a positive cash flow and increases your overall taxable income. Therefore, you will pay more in tax with a positively geared property.

If your goal is to create a passive income, avoid negative gearing where possible.

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Find out what tax deductions you are eligible for

Property investors are eligible for many tax deductions for their rental properties. Remember that rules can change and you won’t necessarily be eligible for every deduction possible. Check the Australian Tax Office website for up-to-date information. It’s also smart to consult with a tax agent, who may be able to help you reduce your tax in accordance with the law.

Some of the most common tax deductions on rental investment properties include:

  • The interest you pay on your investment home loan
  • Costs associated with advertising for tenants
  • Maintenance, repairs and garden upkeep
  • Some legal fees
  • Property management or agent fees
  • Land tax
  • Water charges
  • Insurance
  • Pest control
  • Travel fees

Try to pre-pay most of your bills before 30 June to maximise your tax deductions in that financial year. Don’t forget to hold onto any receipts relating to property expenses!

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Claiming tax breaks for investment property depreciation

Did you know that you may be able to claim a tax break for your investment property’s declining value?

You are entitled to claim depreciation associated with the wear and tear of the property, particularly after you or the previous owner completed renovations, improvements or installed new appliances.

In order to legally claim tax deductions for the structural components of your property, you’ll need to arrange a depreciation schedule. The costs associated with obtaining a depreciation schedule are tax deductible and the schedule can help you make even bigger tax savings.

Renovations and repairs

While many investors are under the impression that renovations and home improvements are considered automatic tax write-offs, this isn’t usually the case. For example, if you decide to update the kitchen, this improvement won’t usually be considered tax deductible until it depreciates over the years.

You must inform the ATO on how much you spent on renovations in order to claim tax deductions. You may even be able to claim depreciation on renovations made by the previous owner. In cases like this, where you might not know the cost of renovations, the ATO appointed quantity surveyor may make an estimate.

For any initial repairs you make, consider claiming these as capital works, rather than an immediate deduction. By claiming capital works deductions on repairs and improvements, you’ll save much more in interest over time. However, if you aren’t planning on keeping your property for long, this might not be the strategy to use.

Claiming tax deductions for property depreciation can be complicated, so consider using the services of an accountant.

Reducing capital gains tax

Capital gains tax (CGT) on property is a tax obligation that is unique to investors. It comes up when you sell your property and make either a capital gain or a loss. If you make a capital gain (i.e. your profit by selling your investment property), you will likely be subject to CGT. If you make a capital loss, rather than a gain, you won’t be subject to CGT.

CGT is often unavoidable and the rate will typically be inline with your marginal tax rate. However, there are ways to reduce it.

Just by owning the property for over a year, you will likely make yourself eligible for a 50% CGT discount. Plus, many of the costs associated with owning the property will offset how much tax you will be charged.

Read our article about capital gains tax to learn more about potential tax exemptions and concessions.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, home loan, investment, investment property, investment loan, capital gains tax

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