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Property Investing Basics: Understanding Property Investor Taxes

Property Investing Basics: Understanding Property Investor Taxes

By Sarah Lefebvre on Mar 09 2016
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So far in our investing series we have looked at negative gearing, property cycles, the costs of investing in property, and what makes a good investment. This month we talk to Ken Raiss, Director Chan and Naylor and share his insights on the all important topic 'Property Investor Taxes'.

Understanding Property Investing Taxes is Critical

Are you thinking about entering the property marketer as an investor? If so, it's a good idea to get clued up to the various taxes you will inevitably face.

According to the Australian Bureau of Statistics, every month sees around $12.5 billion lent to property investors, a far cry from just four years ago when that figure was closer to $7 billion.

Thus, it's clear that more people are realising the benefits of property investment, which is why we've enlisted the services of an expert in the field.

Ken Raiss is a certified accountant and Director at Chan & Naylor. He has been practicing since 1985, continuing an avid interest in real estate investment while maintaining a sizeable property portfolio of his own.

Here are some of his insights on property investor taxes.

A Part of Doing Business

Taxes, like any other expense, should be seen as simply a cost of doing business. According to Mr Raiss, some of the most significant expenses you can encounter as a property investor include:

  • Land tax: Requires self-registration, which is important to be aware of as many people forget and then find themselves back-dated with debt
  • Depreciation: Includes the actual building, fixtures and equipment, but it's also important to get a scrapping schedule when doing renovations
  • Borrowing expenses: These can include the mortgage establishment fees and lenders' insurance, but can actually be written off after five years
  • Strata fees: Only applies if you purchase a property within a strata block
  • Council rates and water: A fundamental cost
  • Capital gains tax: Fortunately, this only applies when you sell, however, it's important that you add back the depreciation on the building to calculate your taxable profit

Run your numbers

"When doing feasibility studies for your property investment, you should then factor in all the expenses," Mr Raiss said.

It's crucial that you're fully aware of your monetary standing before making any financial commitments, as you may have enough funds to cover the home's price tag, but what about the taxes that come afterwards?

Mr Raiss assures that you can calculate and determine exactly what you will be up for, although with the constantly changing laws and rates it's a good idea to see a professional.

The only expense you won't be able to accurately predict is the capital gains tax, as that will obviously depend on how long you've kept the property and its growth.

How Can you Mitigate These Costs?

"What I've noticed, is that a lot of people sell a property to crystallise their capital gain and trigger some of these taxes, which can actually add up to 20-25 per cent of the selling price, when they then go and reinvest," said Mr Raiss.

So basically, only sell a property if it's not performing! The second way to reduce your costs is to take advantage of the multitude of tax benefits available to property investors.

"You can claim deductions on any expense that you incur to generate the rental income," said Mr Raiss.

This can include bank fees (like an early break from a fixed home loan), maintenance, council rates, decline in value of depreciating assets and property agent fees and commission.

Mr Raiss recommends utilising features for your investment loan, such as an offset account. 

"We see a lot of people getting a redraw facility, which means when you put the money in it reduces your debt," he said.

However, if you pull the money back out again, the Australian Taxation Office will look at what you use it for. If it isn't for business or investment purposes, it's no longer tax deductible, which can be a big trap for people with an incorrect loan structure.

Talk to the professionals

Mr Raiss affirms that one of the biggest advantages of going to see a financial adviser or property accounting specialist about your real estate ambitions, is that it can help push you into creating a budget and encourage you to look down the barrel of how much you really need.

This is in addition to ensuring that you're employing the most fitting ownership structure and maximising deductions.

"One of the biggest reasons for failure, is people haven't had a strong enough reason to actually go and invest," Mr Raiss continued. "For a lot of us, it's uncomfortable. It's outside of our comfort zone to take on debt, security and management of assets".

Therefore, the 'why' has to be strong enough to break through that inertia and get your property investment journey off the ground.

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