Investing into real estate is about creating wealth, not reducing taxes.
I don’t think this is spoken about enough, because I still see countless ads on social media suggesting that everyone should buy property to reduce their taxes and I’ve spoken to clients who have received the same advice from accountants. I think this is the wrong way to approach it.
It’s like saying eating healthy food might allow you to lose some weight. That is a by-product of eating healthy food; the main benefit is that you will feel a lot better and healthier internally. While tax savings are great, the primary focus of investing should always be wealth creation.
Talking tax
Tax time might not be the most glamorous aspect of property investing, but getting it right is essential, especially since the Australian Taxation Office (ATO) pays special attention to property investors.
Here are some expenses you can claim against income as a property investor:
- Agent fees – including property management fees, lease preparation fees, or even the cost of advertising your property.
- Strata fees – these are paid if you own a unit or townhouse that’s part of a larger complex, and can be claimed against your income.
- Loan repayments – you can’t claim payments against the principal, but the interest portion is deductible.
- Council rates.
- Water rates.
- Repairs.
- Insurance – including building insurance and landlord insurance.
If you’ve set up a home office and use this to manage your properties, you can claim a portion of your internet, electricity and even office equipment as deductions. Note that you can only claim a proportion based on the time spent specifically managing your property.
The ATO has become more vigilant in monitoring property investors, and tend to scrutinise specific areas:
- Interest deductions – You can only claim interest related to your investment
property. Ensure you’re not mistakenly including loans unrelated to your
portfolio. - Repairs versus renovations – Immediate repairs on your investment
properties are fully deductible, but capital improvements, such as adding a
room or upgrading the kitchen, need to be depreciated. Again, an accountant
is best to advise you in this area. - Rental income – Ensure all rental income, including income from short-term rentals such as Airbnb, is reported. Also ensure you’re charging rent consistent with what the ATO calls a ‘commercial’ level. (No renting the property cheaply to a family member and then charging all the expenses against your other income.)
Reducing taxes as a property investor
Reducing your taxable income goes beyond claiming your property expenses as deductions.
Consider options such as salary sacrificing, for example, to reduce your taxable income. This is where you direct a portion of your salary into your super before tax, effectively lowering your taxable income.
Another tip is to make sure you’re claiming everything you’re entitled to, whether it’s from work-from-home expenses, or deductions related to your investment properties.
Engaging a quantity surveyor
One of the lesser known resources for property investors is the quantity surveyor. They play a key role in calculating the long-term depreciation of your property, which can then be claimed as a tax deduction.
Depreciation is essentially a non-cash deduction that lowers your taxable income. If your property is less than 40 years old, you can typically claim depreciation on the building and certain fixtures. This can significantly reduce the amount of tax you owe, particularly on positively geared properties.
Even if your property is older than this but has had capital improvements more recently, you might still be able to claim depreciation on the value of these improvements. A quantity surveyor will be able to advise you here.
For just a few hundred dollars, hiring a quantity surveyor is well worth the investment. They provide a detailed depreciation schedule that you can forward on to your accountant – and can save you thousands in taxes over the life of your property.
Understanding capital gains tax
Capital gains tax (CGT) is another area where property investors need to plan carefully.
One effective strategy to reduce CGT is to hold your property for more than 12 months before selling. If you sell your investment property within the first year, your full profit will be taxed at your marginal tax rate – which could be almost 50 per cent of your profits if you’re in the top bracket. However, if you wait beyond the 12 months, you’re eligible for a CGT discount, cutting your tax bill in half.
Another tip is to time your property sale strategically. Selling just after 1 July means you won’t have to pay CGT for another 12 months, giving you more time to plan and manage your tax payments effectively.
Engaging a property accountant
One of the most underrated experts in your team is your accountant. You need a savvy property accountant on your side. They’ll help you navigate the rules, keep you compliant, and most importantly, ensure you’re keeping more of what you earn.
If you don’t have someone already, ask a friend or colleague who’s in a similar position for a referral or search online (make sure you always check the feedback and comments from other clients.)
By outsourcing your tax returns, you can really level up your tax minimisation strategies and, as a property investor who is looking to retire filthy rich, you will need all the help you can get.
This is an edited extract from Retire filthy rich with real estate: Your step-by-step guide to
building wealth through property by Ravi Sharma (Wiley $29.95), available at all leading retailers. Visit Search Property.
