Friday, May 31, 2013

Negative Gearing for Tax

Negative gearing can have significant tax benefits but don't let it be your only motivation for buying an investment property. The property you choose needs to stand on its own merits so that it has the potential to make money in the long term through capital gains.

What you want to achieve is a situation where tax rebates and your rental income are used to pay off your home loan, and down the track when your property has increased in value you can sell it at a profit or keep accumulating multiple properties.

Indeed, one of the main advantages of negative gearing is that it may let you invest in a more valuable property than you would otherwise have been able to afford using only your cash savings.

When using negative gearing, it's important to be prepared for unexpected impacts on your cash flow, such as interest rate rises, unforeseen repairs in your rental property or a period of vacancy. In these situations you need to be in a financially strong enough position to be able to repay the shortfall and continue servicing your home loan.

You can overcome many of the risks of negative gearing by doing some homework and selecting your investment property with care. When you're ready to invest your mortgage adviser can help you find a loan that suits your needs.

What you can claim on tax

As a property investor seeking a tax benefit you should always look for the greatest amount you can claim in expenses on your rental property. Keep in mind that the Tax Office takes a close look at rental property claims so it's essential to keep good records of all expenses.

Expenses for which you may be entitled to an immediate deduction in the income year you incur the expense include:

• advertising for tenants
• body corporate fees and charges
• cleaning
• council rates
• gardening and lawn mowing
• insurance ( building, contents, public liability)
• interest expenses
• land tax
• pest control
• property agents fees and commissions
• repairs and maintenance
• travel undertaken to inspect the property or to collect the rent
• water charges.

Expenses that may be claimed over a number of income years:

• borrowing expenses
• amounts for decline in value of depreciating assets, such as carpet, furniture and appliances
• capital works deductions, i.e., certain construction expenditure.

Did you Know? 

You can't claim these on tax:

• acquisition and disposal costs of the property - these are usually included in the property's cost base for capital gains tax purposes
• expenses not actually incurred by you, such as water or electricity charges paid by your tenants
• expenses that are not related to the rental of a property
• GST credits for anything you purchase to lease the premises

For more information about common mistakes made when claiming rental property expenses, see 'Rental Properties - avoiding common mistakes'.