A Property blog by Paul Bennion.
One of the key reasons for growing activity by property investors during the 2014/2015 financial year has been record low interest rates.
Interest rates are now so competitive that astute property investors can even secure fixed interest rates for even below 4%.
However, record low interest rates can be have ‘hidden traps’ for property investors, especially those on high incomes.
While falling interest rates means that the cost of holding a property is reduced due to lower mortgage repayments, it can also mean that the negative gearing benefits associated with owning an investment property are reduced.
Traditionally, high income earners have been attracted to buying investment properties due to the negative gearing benefits it offers. With interest rates falling to record lows, investors now have to look to other tax benefits associated with holding property such as tax depreciation.
Record low interest rates can also encourage investors to financially over extend themselves especially in hot property markets such as Sydney and
Melbourne where prices have surged in recent years as a result of record low interest rates and a shortage of housing stock.
A hidden danger for property investors in these hot markets is the fact that rental returns have fallen to below 4% because rental growth has not matched the very strong rises in capital growth.
In Sydney, for example, the latest figures produced by CoreLogic RP Data shows that during the year ending May 2015 rental returns have fallen from 4% to 3.6% while in Melbourne they have fallen from 3.6% t0 3.3%.
Buying properties hot markets with low rates of rental returns further highlights the need for property investors to boost their cash flow through fully capitalising on the generous tax benefits associated with tax depreciation.
These tax benefits associated with tax depreciation can be very signification with DEPPRO clients achieving tax benefits obtained through depreciation equivalent to 60% of the total purchase price of the property. In some cases these tax benefits can total $300,000 based on a purchase price of $500,000
Many investors in Australia totally underestimate the number of items that can be depreciated for tax purposes and this comprehensive list can even include garden gnomes, cubby houses and if they own an apartment, then common areas such as car parking and recreational facilities.
To qualify for these legitimate tax deductions, an investor must have a fully compliant tax depreciation company undertake an onsite inspection of the property and then compile a depreciation report based on this inspection.
The ATO is now taking a more aggressive approach to tax deductions made by residential investors and has asked a large number to provide more details about their claims relating to property investments.
Property investors should check that the company undertaking their tax depreciation schedule is a member of The Australian Institute of Quantity Surveyors (AIQS).
Employing a company who is a member of AIQS such as DEPPRO gives protection to consumers that their tax depreciation report complies is completed in a professional manner.
