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When you buy a property with the intention of renting it, you are a property investor. There are two main circumstances investors will find themselves in:
Negatively geared, where borrowing and maintenance costs are greater than the rental income; you run your investment at a loss which you use to reduce your taxable income.
Positively geared, in which the rental property generates more revenue than you spend on the mortgage and maintenance, creating a taxable profit.
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The comparison between a positively and negatively geared property is not a question of ‘good’ or ‘bad’. It depends on the circumstances and goals of the owner. In either approach, you borrow a large sum of money and own a large asset, so it’s worth considering the best way to do it:
- Positively geared properties are cash-flow positive; the income from your property is greater than the ownership costs, so you make a profit. Retirees’ properties are usually positively geared.
- When your rental income is less than the ownership costs, you can use the annual loss to reduce your taxable income. However, you have to meet the shortfall with other income.
- Investment properties (properties that are not your primary place of residence) are subject to capital gains tax when they are sold.
- Some costs associated with the investment property can be claimed as tax deductions. They include management fees, interest, council rates, land tax, maintenance, repairs, pest control, insurance, cost of advertising for tenants, body corporate fees and bank charges.
- You can also claim depreciation of assets such as furniture, washing machines, television sets etc., as well as depreciation of the actual building, which is calculated using a depreciation schedule.
- In order to claim your investment property losses you must keep adequate records and receipts for items you wish to deduct.
Property investments are popular and effective ways to use cash flow to build an income-producing asset. The trick is to select the property and debt ratios that suit you and your goals. Property investments interact with the tax system so it’s worth talking to an expert before buying an investment property.
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