A Finance blog by Paul Bennion.
- Obtaining a Tax Depreciation Schedule: Tax Depreciation is a non-cash deduction, meaning the investor does not receive any money back from a schedule however, it does lower the investor’s taxable income based on the removable assets (fixtures & fittings) and the age of the property, settlement date & property type.
- Pay As You Go: Although this strategy is not common with investors, it does increase cash flow by claiming tax deductions throughout the year as opposed to a one off payment when investors have their tax returns processed. Investors who utilise this strategy will reduce the amount of tax withheld each pay period, although a normal tax return is still required and the end of each financial year.
- Negative Gearing: An investment property is negatively geared when the income generated by the property i.e. rent, is exceeded by the ongoing expenses i.e. interest on mortgage, agent fees body corporate fees etc. For example:Rental Income (per month): $2,400
Less Expenses (per month)
Interest, maintenance etc: -$2,500
Council Rates & Other Expenses -$300
Building Allowance (Depreciation) -$480
Total Shortfall (per month) -$479.04
The shortfall of $479.04 per month ($5,748.48 Annually) can be claimed as a tax deduction.
- Equity: Unlocking equity in an investment property enables investors to further expand their portfolios. Negatively gearing a property in conjunction with claiming depreciation increase investors’ ability to unlock equity in investment properties. Equity can be calculated using the following method:If an investment property is worth $600,000 and the investor/s owe $200,000 on the loan, then the investor would have $400,000 in equity through this particular property which could be used to finance an additional investment property.
- Renovations: A common goal for investors when renovating a property is to increase its value, where its rental value or to attract a higher selling price, nevertheless the aim is to have the value increased. Renovations can range from a fresh coat of paint and new flooring to conducting structural work to an existing property. A major concern is determining when is a good time to renovate as during this period the property may not generate an income for owners.