Are you using the right negative gearing approach?
by David Naylor, co-founder of Chan & Naylor Property Accounting and Wealth Advisory Group
There are many reasons why Australians prefer to loan money to invest in real estate.
Some people believe the value of property does not go down while others just want to see and touch their investments. However, being able to offset the cost of property ownership, including the interest of a loan, against assessable income makes it more attractive.
Chan and Naylor appreciates that cash flow is the most important thing to a residential property investor. While the obvious return for a landlord is in the form of rent from the tenant, the next biggest return is from the Australian Tax Office (ATO) in the form of negative gearing benefits.
Negative gearing is considered a tax strategy more than an investment strategy. Most investment strategies aim to make a profit and investors with negatively geared property aim for the rent to cover the loan costs or that the capital growth can make a profit when the property is sold.
Under negative gearing, interest on an investment loan for an income-producing purpose is fully deductible. Any shortfall is offset in an individual’s taxable income, including the rent from the property and any salary. Repairs and maintenance and small costs are fully deductible while property fixtures and fittings are considered as plant and a deduction for depreciation is allowed.
The question is, will the ATO give you a refund for something you had not paid for? At Chan and Naylor, the answer is yes, when you claim depreciation. When you buy a property, the price includes carpets, fixtures, kitchen and stoves, air-conditioning and other fittings which the investor can depreciate. New buildings may be entitled to claim depreciation of the actual building and this is called “Building Allowance.”
Chan and Naylor recommends that you contact a quantity surveyor about your Australian property investment, to give you a depreciation report which should be handed to your accountant come tax time.
To discuss your strategy in depth,
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