Understand the Market. Benefits of Property Investment – MAS Tax Dandenong
Author │ MAS Tax Accountants Dandenong
Investment in property is a popular method for Australians to build wealth and diversify their risk. Investing in property tends to be a safe and easy option compared to other investments such as stocks. We have outlined below reasons to consider investing in property:
Control over the investment
Unlike other investments, you can be in complete control of your property investment. You will be able to decide type of property investment, location, rental charge etc.
Capital Growth
The value of your property should grow over time and if chosen well can be extremely beneficial. For example if you invest in a $300,000 property and expect it to increase in value by 5% each year for 10 years the value of the property would be $488,668. This is approximately a $189k increase in value for an asset which is highly leveraged (use of debt to increase value). The capital growth ties in well with rental income and the tax benefits associated with property investment.
Rental Income
Rental income is a benefit of investing in property, although this increases your taxable income (see below). Rental income can be utilised to pay the loan and other maintenance expenses (if funds are available) which offsets the income earned (reduces taxable income). With interest rates at an all-time low, many properties are cash flow neutral (cash income = cash expenses) or cash flow positive or ‘positively geared’ (cash income > cash expenses).
Tax Benefits
As noted above, a benefit of renting out your investment property is the receipt of income. This income is however taxable. To offset this income you can claim costs associated with the rental including but not limited to interest on property, council rates, agent fees, insurance etc. If the property is ‘negatively geared’, that is expenses exceed income, you can deduct this against your taxable income (increases taxable income if positively geared). Expenses exceeding income may seem like a negative however in most instances, it is depreciation (non-cash expense) which provides the largest portion of the loss. Depreciation is an expense provided for the “wear and tear” of the building i.e. similar to a car losing value over time. Depreciation is at its highest when a property is new (includes fixtures and fittings) and then decreases over time until only the building is being depreciated (this lasts for 40 years).The examples below show both positively and negatively geared properties.
|
|
Person A |
Person B |
Person C |
|
Taxable Income |
$60,000 |
$60,000 |
$60,000 |
|
|
|
|
|
|
Rent Received |
$20,000 |
$20,000 |
$13,000 |
|
Interest on loan |
($10,000) |
($12,000) |
($12,000) |
|
Depreciation |
($3,000) |
($8,000) |
($8,000) |
|
Other Expenses |
($3,000) |
($3,000) |
($3,000) |
|
New Taxable Income |
$64,000 |
$57,000 |
$50,000 |
In the scenarios above, ‘Person A’ is positively geared whilst ‘Person B’ and ‘Person C’ are negatively geared. ‘Person A’ would therefore need to pay tax on the amount earned from the rental income. ‘Person B’ is negatively geared however without the depreciation they would be positively geared. This is an ideal situation as your cash inflow (money received) outweighs your cash outflow (money paid) but a tax benefit is still received due to the depreciation. ‘Person C’ is also negatively geared but in this instance cash outflow exceed cash inflow. Although not ideal, the tax benefit received (given the above facts) would exceed cash outflow during the year. As you can see from above, each situation will have their pro’s and con’s.
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DISCLAIMER: All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication will be liable in any way for any loss or damage suffered by any person through the use of or access to this information.
