Simplifying Taxes Relevant To Property Investors

I wrote an article recently wherein I summed up how fee and taxes (please include Stamp Duty too) are among the prime buying concerns today. Well! I assume this article then will have its fair share of readers. While you can always claim a few tax benefits as a real estate investor, you should be ready to pay a few taxes just as well (I guess more than a few).

Before I talk about the areas where property investors can claim deductions, it will only be befitting to shed light on those areas where they will incur taxes. Here I go.

First in line is the tax you pay on the income you make on your property. This will obviously be different for investment properties and principal place of residences.

Capital Gains Tax

You make a profit and you start thinking about distributing the proceeds of the profit. Hang on to your horses! There is a Capital Gains Tax (CGT) you will need to pay once your property is sold. The good news is that you can claim a deduction of 50% on your CGT if you have held your property longer than a year.

Council rates

Local councils serve you in innumerable ways. It is only easy to believe that they do not run on thin air. Thus, to help them keep up with their expenditure, investors are levied property tax, also known as council rates. This amount is flexible and will vary in accordance to your property’s market value and the positioning of your municipality.

Land Tax

In economics, you would have heard about Opportunity Cost. If you drink tea daily, you are saving expenses which you would have incurred if you had coffee daily (assuming coffee is more expensive than tea- fair assumption that). The principle of Land Tax is based on the same premise. You pay taxes on the cumulative unimproved value of your land, calculated against the estimated value of land if it was left vacant.

Now for the part property investors love most. Going by the norm, you can seek deductions in these three categories.

Cost of acquisition and maintenance

Such costs may include, but are certainly not restricted to, advertising costs, bank fees and set up charges on your loan, council rates, insurance, interest payable on your investment loans, land tax, legal costs, fee sought by your property manager (including costs of repairs and maintenance), expenses associated with tax, expenses associated with the maintenance or inspection of your property. This list by no means covers all the possible sources of deduction.

Depreciation allowance

You can claim this on appliances, fixtures and fitting which you have newly purchased. The list may include items like shutters, hot water systems, area rugs and furniture.

Negative Gearing

Negative gearing occurs in cases when you do not generate a positive cash flow from your property. You will find your property negatively geared when your annual mortgage commitments and associated costs of maintaining the property exceed the annual rental return.

This, in my opinion, covers a neat stack of relevant property tax information.

Are you in favour of or against negative gearing?