Why would anyone want to invest in a property that is only going to generate losses? Many newbie property investors struggle with the question a lot. Although it might seem like a not well-thought-out strategy, negative gearing is a lucrative long-term property investment approach. It is mainly the case regarding taxation, an area that is quite challenging for newbie property investors to navigate. With the right approach, negative gearing can have a significant impact on property taxes. Here is how.
Tax Deductible Renovations
Many negatively geared properties are either rundown or have been in the market for too long, and thus, are available at significantly reduced prices. Such properties offer an excellent opportunity to increase value through renovations and improvements. Since a property owner is open to making losses over the next few years, they do not have to worry about the amount spent on renovations. The reason is that such renovations are tax-deductible and reported in your income tax return. Since most property investors charge low rental rates on renovated properties to ensure maximum occupation, the resulting losses are offset by the huge claims on renovations.
Minimising Taxable Income
Another tax advantage of negatively geared properties is the reduction in taxable income. It is essential for property investors with high marginal tax rates or those that want to capitalise on their investment as they build their portfolio. The main characteristic of negatively geared properties is that expenses outdo the income derived. Therefore, costs such as interest on repayments, insurance premiums, property management fees, and maintenance charges all add to the expenses, lowering the total taxable income. Therefore, an investor ends up paying a lower tax than they would have if they invested in a positively geared property.
Depreciation
Other than renovations, you may purchase some items for a negatively geared property to improve aesthetic value. It includes things such as lawnmowers, sprinklers, and mulchers. Since the pieces of equipment will be used to maintain a negatively geared property, their decline in value over time should be considered when preparing a tax depreciation schedule. Therefore, an investor who claims depreciation on such items improves their tax position by further increasing a property's losses. Thus, an investor can claim the greater loss as a legitimate tax deduction against their total income, boosting their tax refund. Therefore, the more depreciable maintenance items you add to your negatively geared property, the higher the tax refund.
To learn more about negative gearing, talk to a tax service, such as Anthony Gigacz & Associates Pty Ltd.
Share24 February 2021
Welcome to my blog! My name is Jules, and I have been running my own business since before I left school. Through the years as my business grew, so too did my tax burden. However, I recently discovered that for many years, I wasn't taking the right deductions and as a result was paying too much tax. I educated myself on the tax law, and I meet with several accountants who helped me navigate the expansion of my business. I hope that all small business owners and independent entrepreneurs can have a positive experience filing taxes, and because of that, I created this blog. I hope these facts, ideas and posts help you and your business to prosper.