When it comes to investing in real estate in Australia, the potential for profit is substantial. However, so too is your tax liability. Luckily, Australia's taxation system provides myriad options for savvy investors to reduce their tax exposure and maximise their returns. Understanding these can be the difference between your investment being a little goldmine or a financial flop.
Let's explore some of the key strategies you can employ to reduce your tax burden in real estate investment, including employing the assistance of a personal tax accountant.
Claiming Deductions
First and foremost, it's important to understand what tax deductions you are entitled to as a real estate investor. Expenses spent on managing, maintaining, and repairing your investment property can typically be claimed back at tax time. This includes things like council rates, water charges, building insurance, cleaning, gardening and pest control, property management fees, and even some bank fees.
Furthermore, if your investment property is negatively geared - meaning the rental income is less than your expenses - you can deduct this loss against your other income. This can significantly reduce your tax burden.
Read more: How Negative Gearing Can Help You Save Tax
Depreciating Assets
Asset depreciation refers to the reduction in value of an asset over time due to wear and tear. The Australian Tax Office (ATO) allows property investors to claim depreciation on certain assets within their investment property. Essentially, this means you can claim a tax deduction for part of the cost of your property each year.
There are two types of depreciation: capital works deductions for the building's structure and its permanent fixtures and plant and equipment deductions for removable items like appliances, carpets and window furnishings. Make sure to get a professional depreciation schedule done by a qualified quantity surveyor to maximise your depreciation claims.
Utilising the Capital Gains Tax Discount
Australia's capital gains tax system is quite generous when it comes to providing discounts for long-term investments. If a property is held for more than 12 months before selling, you will be entitled to a 50% discount on the capital gain, potentially saving you thousands of dollars in tax.
Keeping Good Records
Good record-keeping is crucial in order to take full advantage of the tax deductions and concessions available. This means keeping track of income and expenses related to your property, as well as costs associated with the purchase and sale of the property. Don't forget that some expenses, like borrowing costs and renovation expenses, can be claimed over several years.
Getting Professional Tax Advice
While it can be tempting to attempt to navigate these tax benefits yourself, employing the services of a knowledgeable property tax advisor or accountant can literally pay dividends. They can help you strategically plan your investments, show you how to take full advantage of the taxation system, and ultimately ensure that you are operating within legal parameters.
Investing in a Self-managed Super Fund
Finally, another strategy to reduce tax liability is by purchasing property through a self-managed super fund (SMSF). Any earnings in the SMSF are taxed at a concessional rate of 15%, and capital gains at a reduced rate of just 10% if the property is held for more than one year.
While investing in property through an SMSF can be an effective way to reduce taxes and build wealth for retirement, it's certainly not a strategy for everyone. Rules and regulations around SMSFs are complex, and getting things wrong can have serious consequences. Again, professional advice is key.
Navigating the minefield of tax benefits in real estate investment can be challenging, but with effective strategies and good advice, you can seriously reduce your tax liability. At Perth Tax People, we can help you make the most of your investment income. Contact us to get started.
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