Are you a property investor, or considering becoming one? Do you understand negative gearing, positive gearing and depreciation? If not, this post is for you. These are some of the basic terms about property investment that you must understand and give consideration to when deciding to invest or evaluating your current investment.
Negative gearing is more a tax strategy than an investment strategy. But of course it also has investment benefits.
Negative gearing is when you offset the financial loss associated with your investment property against your income. This is possible when the cost of owning your property is more than the rent you receive from your tenants. Some of the costs that you can claim include:
- Bank charges
- Interests on loans
- Land tax
- Lease document expenses
- Pest control
- Agent fees and commissions
- Quantity surveyor’s fees
- Secretarial and bookkeeping fees
- Security patrol fees
- Stationary and postage
- Telephone calls and rental
- Maintenance and repairs to the property
- Leasing expenses
- Advertising for tenants
- Body corporate fees and charges
- Council rates
- Water charges
- Gardening and mowing
- Travel expenses to and from the property
Most people that utilise the negative gearing strategy are hoping the rent will one day cover the loan costs, or that the capital growth in the property will allow them to make a profit in the future when they sell.
It is essential you approach this strategy with the understanding that you need to cover the shortfall of cash needed to cover the expenses. Therefore, we recommend you see your accountant to discuss the tax benefit versus that cash you will have to contribute, and make a decision about whether you can afford to support this property over time.
Positive gearing is when the rent you receive from the property is more than the costs of owning the property, resulting in you making an income. This income may be subject to tax.
This is one of the best strategies for investing in property and often one of the least considered. Investments that can make you an income straight away are generally good investments. However, you must remember that your taxable income will increase and thus plan properly to cover the additional tax payable at year-end.
Of course you would also need to consider whether this type of property will have any effective value increase in the future, or whether it is likely to suffer from value drops in tough times. This can sometimes leave people with properties that they cannot sell when they need to.
You can claim the value of the depreciation of your investment property and items within the building against your assessable income. This is the estimate that the value of those items goes down each year because they are being used. That value reduction is effectively the amount you can expense off those assets. All you need to do is get your property inspected by a qualified quantity surveyor and provide the report to your accountant
Depreciation is a great tax deduction because it doesn’t affect your hip pocket first. It is a non-cash tax deduction.
There are two types of depreciation:
- Plant and equipment – items within the building such as fridge, washing machine, furniture, carpets, blinds etc.
- Building allowance – construction costs of the building itself, such as bricks, concrete and timbers.
So how old does your property have to be to claim depreciation?
If it was built after July 1985 you can claim both types of depreciation. If built before this date you can only claim depreciation on plant and equipment.
You can also claim depreciation on renovations by providing the cost of renovations or getting it estimated by a Quantity Surveyor. Your accountant can assist with depreciation calculations for renovations if the invoice information is available.
We talked to one of our local Quantity Surveyors, Dave Ryan from Building and Pest Inspections (BPI) South Gold Coast / Northern NSW, to find out what this type of service might cost you.
Mark: Dave, how much does it cost for a property investor to get an inspection and depreciation schedule completed on the Gold Coast?
Dave: For both the inspection and preparation of the depreciation schedule it costs between $550 and $650.
Mark: How long does it normally take to have the depreciation schedule completed?
Dave: We’ll have the depreciation schedule to our clients within two weeks.
Mark: Great. Thanks Dave.
You can contact Dave on 0421 641 301 or by email at [email protected].
If you have not been claiming depreciation on your investment property and could have been, contact usas there may be an opportunity to amend your tax returns.
Capital gains tax
You may make a capital gain or a capital loss when you sell a rental property that you bought after 19 September 1985.
If you sell your property for more than the price you bought it for, plus any incidental costs associated with acquiring, holding and disposing of it (such as legal fees, stamp duty and real estate agent’s commissions), then you may be subject to capital gains tax. The cost of the property (cost base) may be reduced by the value of construction expenditure carried out on the property, that you have claimed as a capital works deduction.
Look out for our seminars in the near future on this subject and many more.
For full ATO details on rental properties download Rental Properties 2013 and