·  Legal News, Analysis, & Commentary


Property Investments are Ideal for Tax Benefits (Here’s How)

— September 20, 2019

Australian tax and property law makes property investments an attractive strategy.

There are many reasons why property investments are so ideal for tax benefits. Some of them stem from the fact that they create a steady stream of passive income, have a high fix-and-flip potential, as well as a chance to transform the place. For instance, if you decide to do so, you can turn the property that you own into a wedding venue, thus completely changing the way in which this place generates profit. However, one of the additional benefits of any type of property investments are the numerous tax benefits for property owners.

While the tax on homes, land and farms that you own fills the government treasury, the truth is that with the current state of the homeownership amongst the millennials, this might not be the best course of action. Fortunately, by informing themselves on some of these tax benefits, a lot of them might see why owning a property tends to be such a lucrative idea. For this reason alone, here are the top four property investment tax benefits that you could exploit to your own benefit.

  1. The advantage of negative gearing

In order to fully understand this advantage, it’s important that you understand both the concept of negative and positive gearing. You see, when you borrow money in order to invest and you actually make a profit, this is known as gearing. A positively geared property is the one that creates the rental return that exceeds the amount of money that you have to pay back in interest repayments and outgoings. It’s incredibly important that you understand all of this, due to the frequency in which these options can be used.

This brings us to the negative gearing which is one of the biggest benefits that Australian real estate investors enjoy. It is the fact that there’s a likelihood that you can claim the money you’ve lost by investing in property. This can be claimed against the tax that you’ve paid through some other kind of investment, which means that this is an option that’s oriented towards those looking to diversify their investment portfolio. Even if you’re not actively investing, the tax you’ve paid through your employment also counts towards this.

  1. Capital gains tax exemption

Out of all the real estate property that you own, one of them is your principal place of residence. This is why you can apply for capital gains tax exemption for the place of your permanent residence. The way in which this works is fairly simple. Once you decide to sell this property (which may eventually happen), you’ll find yourself in a scenario where you don’t have to pay tax for the gain that you’ve achieved on this property. While to some this may sound a bit paradoxical, due to the fact that this requires you to rent out your permanent place of residence, the truth is that these scenarios definitely have legal precedence.

Red, white and grey toy house sitting on table next to house key on keyring shaped like a house; image by Tierra Mallorca, via
Red, white and grey toy house sitting on table next to house key on keyring shaped like a house; image by Tierra Mallorca, via

Aside from this, there’s the concept known as partial capital gains tax exemption, which is another thing you should consider. Still, even for a partial exemption, the place needs to be listed as your permanent place of residence. Other than just listing it, you need to wait for at least two years of the last five years before you sell the place. Just don’t let this confuse you, seeing as how you don’t actually have to own the place for full five years prior to the sale. As soon as those two years are up, you’re eligible for the exemption that you want.

  1. The tax depreciation

Keep in mind that while the prices of the real estate change over time, the majority of assets are up for depreciation. After all, the quality of the materials used, their structure and durability degrade over the course of time and selling a building that was built a month ago is not the same thing as selling the place that was constructed years and years ago. This is what tax depreciation is all about. It’s a presumption that the value of the property is at its peak during its first year and that, in a set amount of time, its value will reach zero. Due to the fact that the property in question declines in value, it would be illogical to keep paying the same taxes for it.

The problem with making an adequate estimate here lies in the fact that depreciation isn’t always calculated in the simplest, most straightforward manner there is. Instead, you may need to look for a professionally-made quantity surveyors report. By understanding your tax depreciation, you’ll figure out exactly how big of a deduction you can look forward to.

  1. Withdrawals from an equity loan

Other than this, it’s also important to mention that you don’t have to pay the tax on the money that you withdraw through an equity loan. This is why if the value of the property rises and you still have no intention of selling, you can access a significant portion of that money by applying for an equity loan from the bank. 

Sure, this is a loan and you will have to pay a substantially larger monthly mortgage payment, however, it does give you access to more instant money. All of this is due to the fact that, technically, since it’s the money you owe and not the money that you own, this is not the type of gain that improves your financial status.

In conclusion

In the end, there are several things that you need to take into consideration, ranging from the fact that the Australian income year ends on 30th of June and that you have until the 31st of October to lodge all your tax returns for the previous income year. Also, keep in mind that all the above-listed is nothing more than the current state of affairs and, as such, it’s prone to change. In general, it would be best to consult a financial expert or outsource this to a professional accountant before deciding on the direction that you want to take.

Join the conversation!