The brutal reality of your last tax return might be a repressed memory. But if you’re a property investor (who has done it the smart way - like one of our clients), then you’re probably feeling better about it than most.
That’s because investing in property is one of the most popular ways for everyday Australians to save thousands in tax every year, while doing something positive for our financial future.
So how do we do it? Well, like most things, there is a smart way and a hard way to invest in property. And the smart way will help you save a bucket-load in tax.
Your investment property is like your own business. It’s job is to make you money. And many of the expenses you have for purchasing and maintaining it can be claimed as a tax deduction.
This can range from interest on your loan, to insurances, to property management fees. A big one - and this is important - is depreciation.
As your property ages, the value of the structure and the fixtures and fittings inside, reduces in value, or depreciates. This depreciation can also be claimed as a tax deduction. Depending on the property, depreciation could give you deductions of in excess of $10,000 in a year.
A clever way to maximise your tax benefit from depreciation is to buy new property. New properties can provide you with significantly more in depreciation (often thousands each year) than older properties, and also come with the benefit of lower costs (and headaches) of maintenance and repairs.
Make sure you have good tax advice from an experienced accountant to ensure you are claiming the maximum deductions possible. This will help to reduce your taxable income, and put more of your tax dollars back in your pocket.
Stamp duty (or transfer duty) is the tax you pay to the state government when you buy property. The more expensive the property, the higher your stamp duty bill.
One way to reduce your stamp duty is to buy vacant land on which to build a house, because you will only pay stamp duty on the value of the land, and not on the cost of construction. This can mean a huge reduction in the amount of stamp duty you actually have to pay.
For example, if we purchase an established older house as an investment property for $500,000 in Queensland, we can expect to pay around $16,000 in stamp duty. However, were we to buy a block of land for $230,000, on which to build a house with construction costing $270,000 (so the total cost of land + house was also $500,000), we would be almost $10K better off, as we’d only pay around $6,500 in stamp duty.
You should also check for stamp duty concessions and exemptions which different state governments offer from time to time, for example, for first home buyers.
Land tax can also sneak up on unsuspecting property investors. The rules vary from state to state, however if the total land you own in any one state is over a certain amount, then you will likely receive a land tax bill.
You can avoid paying or reduce your land tax by diversifying your property portfolio across different states, to stay below the state’s threshold amount. This can also help you take advantage of different property markets, which will likely perform differently at different times.
So the smart way to invest in property will have you paying less - which means more money in your back pocket. It’s there for you to drive back into your investment property, to help with your property’s cashflow, supporting your investments so they can do their job for you: grow in value and give you an income, over the medium to long term.