Positive Cash Flow Properties And Your Tax
When investing in any income producing assets, it’s perfectly allowable to make a claim for any up-front, ongoing and selling costs of that item and when it comes to properties, it is certainly a helpful bonus to the landlord.
When you buy a property, any income you receive from that in terms of rent (or as a Wrappee payment) will be tacked onto any other income you earn although you are allowed to deduct any costs you may have for holding the property before you are charged any extra tax on it – what is left over then becomes your taxable income.
There are several different categories that determine what and when you can claim some tax benefit.
Capital Costs are the first type of cost that you will run into when you buy a property – and the biggest. These include:
Stamp duty you have paid to the government on the purchase price which varies in each state.
Any pest or building inspections
Commissions or payments made to selling agents
Any costs involved with renovating the property (though renovations or additions are not advised in the case of a Wrap property)
Fees and charges by conveyancers or solicitors
Any other costs involved with purchasing or effecting the sale of the property
These costs will be taken into account at the end of your holding period (upon sale) and when calculating your capital gain for tax purposes.
There are normally a lot of ongoing expenses when you purchase an investment property and these can be claimed against that and any other income you earn to reduce your tax bill, as long as the property is income producing. In relation to a Wrap property, this list of expenses is cut dramatically in the first instance as the costs become the responsibility of the Wrappee’s. The following are a short list of things that I mean in relation to this, but it is in no way an exhaustive list:
Pest control and building maintenance
Water rates, council rates and all energy costs
Cleaning, gardening and property maintenance
The tax office already has a standard way of deciding how much your property depreciates through age, wear and tear (even if the price of the property rises) and so this is an easy tax claim to make on your property. Some of the capital works deductions that are taken into consideration include such things as the driveways and paths, wiring, plumbing, gas fittings, windows, shutters, in-ground pools etc.
You can also claim back some plant and equipment costs such as any furniture, whitegoods, floor coverings etc but this is not as likely in the event of a property purchased and contracted as a Wrap.
No matter where you are in Australia, you will be charged land tax for any landholding outside of your principal home. Unfortunately it is also a tax that catches many property investors off guard yet is unavoidable.
Capital Gains Tax
Like the land tax, this is an unavoidable cost for investors in all states of Australia and will need to be paid at the time of on-selling your property.
This is only a very brief explanation of the types of taxes you can expect from your investment property so it really is a wise thing to get some solid financial advice before stepping into this type of investment.