Investment properties can be a great way to qualify for major tax breaks. But there’s a caveat to this: timing is everything.
Investing in a property prior to the End of the Financial Year (EoFY) makes you, as a property investor, eligible for certain tax deductions.
Settling prior to 30th June, if you can, makes you eligible for a tax return immediately, as of 1st July. Otherwise, you’ll still be eligible, of course, but you’ll only see those savings next tax year.
The trick is to time your purchase in a way that will set you up for maximum tax savings and to help you get the most value out of your purchase. You’ll want to time your transaction, not only prior to the EoFY but also with a period at the bottom of the property cycle, if possible. This would be when prices have “bottomed out,” rather than when they’re over-inflated.
What Tax Deductions Do I Qualify For?
You can qualify for several kinds of tax deductions on investment properties including:
- Interest claimed on a loan for an investment property
- Depreciation of the building each year, constructed after 1985
- Depreciation of fittings likes lights or windows (rates can range anywhere
from 2.5% to 4% of the price paid)—as long as it is a newly-constructed property
- Holding costs: the expenses you’ll be paying to hold on to the property before you can actually rent it out (particularly on new builds or constructing on vacant land)
Crunching the Numbers
So, how much, precisely, would you stand to gain? The numbers are variable so let’s take a look at a mock scenario.
We already know that if you, the property investor, had invested in a property after the EoFY, you would only be eligible for tax deductions in the next year.
Prior to 1st July, even as late as 30th June, you could be eligible for the following savings:
Let’s say you’re looking at a property in Brisbane. Through our holistic and detailed research methodology, Calla Property Insights, we’ve found out that Brisbane continues to be one of the best performing property markets in the country. The migration many are making to more affordable homes means that Brisbane will have strong growth potential, and the right properties in these locations could be profitable long-term investments.
In this example, let’s say you have an annual income of $120,000 and you’re interested in a property worth $400,000 in Brisbane, QLD. So, you get a loan for $425,000 because you’ll be paying conveyancing, stamp duty, and other associated fees.
Image Source: Australian Stamp Duty Calculator
Let’s say the total tax deductions you’re eligible for are as follows:
- Interest: calculated at a 4.25% rate on a 30-year mortgage, this would be $17,921 for the first year
- Rental expenses: $5,685
- Depreciation of building: $6,400
- Depreciation of fittings: $4,557
- Loan costs: $120
The total amount you’d be eligible for is: $34,683
Now, factor in your rental income, estimated at roughly $24,000 per year (which is $2,000 x 12 monthly rental payment). Your rental income should be about the same as your mortgage payments. Since your mortgage payments, in this case, work out to $2,101, your rental income should also be around this amount.
Image source: Australian Securities and Investments Commission
The annual rent counts as taxable income so add it to your salary: $120,000 + $24,000. Before your deductions, this is a taxable amount of $144,000.
$144,000 (total taxable income) less $34,683 (total amount of deductions from expenses) = $109,317 (new total taxable amount).
Without tax deductions and your investment property, you’d be paying taxes on $120,000, which would be $32,032. With your new investment property deductions, you’re paying taxes on $109,317, which works out to $28,079,
That’s $3,953 in savings!
Gaining a Tax Variation
If you invested in a property after the EoFY, is all lost?
Actually, property investors can apply for a tax variation, which allows them to benefit from a property tax refund paid out into your pay packet, rather than waiting a year for a refund.
On a property that costs you $40,000 per year to keep up and gives you a rental income of $37,000, you can claim the loss of $3,000 on your tax return. You can also claim the depreciation deduction. Let’s say it was $5,000 in this case. That would make your claim a total of $8,000.
To keep our numbers round, let’s say you pay tax of around 45% + 2% of Medicare levy on the income.
($37,000 x 45%) + ($37,000 x 2%) = $17,390
Then, deduct the amount of the claim: $17,390 less $8,000. You would be eligible for $9,390 back at tax time.
That’s additional funds you could put towards paying the mortgage or making a bill payment!
These are the kinds of insights our team at Calla Property is known for. Through our free service, we act as a bridge for our clients who are interested in building their dreams and personal wealth via property investment. Our expertise, experience, and research-driven methodology enable us to identify the right property, in the right place, and at the right time for your investment needs. Book a no-obligation Discovery Session with us today to know how we can help.
Disclaimer: No part of the information or calculations here are intended as advice. This is for general information purposes only.