More and more Australians are pushing to enter the investment property market as property prices continue to skyrocket.
In this article, we will discuss investment properties and why they are an excellent strategy to minimize tax.
What is negative gearing?
Negative gearing in an investment property happens when the associated costs of owning a rental property exceeds the rental income received. In other words, you lose money.
Why would I want to lose money?
When negative gearing occurs, it creates a taxable loss that can be applied against your personal income. By reducing your taxable income, you reduce the amount of tax you pay.
Here's an example
Bob earns a salary of $80,000 a year.
He also owns an investment property generating $25,000 in rental income per year. The associated costs of holding the property including mortgage interest is $30,000 per year. This gives Bob a rental loss of $5,000 which he can use to reduce his income.
Therefore, assuming he makes no tax deductions, his taxable income will reduce from $80,000 to $75,000 meaning he will pay lower taxes.
If you have a new property, getting a tax depreciation report will provide massive tax savings to you as it utilizes the depreciation from the building and any in-built assets within the property to provide you with a tax benefit.
The best part is that it is a non-cash transaction since you have already purchased the property.
That being said, you might also want to consider positive gearing as an investment strategy.
At Aero, we specialize in tax returns involving investment properties.
Feel free to contact us if you need any assistance with the management of your tax affairs.