As we are seeing a return of investors to the apartment sector, it is timely to remind potential investors of the various tax advantages – and areas where investors should be cautious – of owning an investment property.
Firstly the key factor that prevents many people from making the decision to purchase an apartment for investment purposes is the comparatively high initial outlay. We constantly hear the main hurdle for all purchasers, both owner-occupiers and investors, is saving enough money for the deposit.
There is no getting around that buying a home, for yourself or for the investment potential is expensive. However this is balanced by the property market being relatively stable and supported by real demand. Everybody needs somewhere to live and a roof over their head, and the property market has shown over the long term that it is generally a solid investment decision.
Being such an important sector of the wider economy, governments of all levels have implemented a range of measures designed to support property development and investment over the years.
Of course, if you are considering purchasing an apartment for investment purposes, please ensure you get the appropriate financial and tax advice.
The first and most well known area where investors can minimise their tax is the ability to claim interest charged for loans as a tax deduction when the accounts in question are used for investment purposes.
This is not limited just to property but, in this instance, the tax deduction could include interest accrued through a mortgage on an investment property.
For example, a $500,000 mortgage for an investment property, assuming interest on the mortgage is at five per cent per annum and paid monthly over a 30-year period, an investor would pay about $15,500 in interest for this loan.
That figure can be used as a tax deduction to offset the cost of your investment property.
Other costs associated with the loan, such as loan establishment fees, account management fees, mortgage insurance fees, mortgage registration, mortgage broker fees and stamp duty on the loan, can be used as deductions.
Another area where owners of investment properties can benefit is claiming expenses related to the apartment or home purchased. Legitimate expenses include body corporate fees, council rates, utilities, insurance and land taxes.
Costs associated with marketing the property, to tenants, such as advertising and property agent fees, can be claimed as legitimate expenses.
Similarly those costs related to maintaining the property – cleaning, gardening, any repairs and maintenance that is required – can be claimed to reduce your overall tax payable.
A common deduction, particularly for investors of new apartments, is the depreciation of the various fittings inside an investment property including things like the lights, power points, windows, kitchen and bathroom sinks and even showers, which are all subject to depreciation.
Developers will sometimes provide a schedule, certified by qualified building surveyors, to help calculate the cost of depreciation on fittings and buildings, as the value of these assets decrease over time.
Depreciation rates can range from two per cent to four per cent of the price paid for buildings and their assets, which can be used to claim tax deductions.