Understanding Property Tax Benefits | western australia
As we see a return of investors to the apartment sector, it is timely to remind potential investors of the various tax advantages – and areas where investors should be careful – of owning an investment property.
First, the key factor that prevents many people from making the decision to buy an apartment for investment purposes is the relatively high initial outlay. We constantly hear that the biggest hurdle for all buyers, whether homeowners or investors, is saving enough money for the deposit.
There’s no denying that buying a home, for yourself or for investment potential, is expensive. However, this is offset by the fact that the real estate market is relatively stable and supported by real demand. Everyone needs a place to live and a roof over their head, and the real estate market has shown over the long term that this is generally a solid investment decision.
Being such an important sector of the wider economy, governments at all levels have implemented a series of measures designed to support real estate development and investment over the years.
Of course, if you are considering buying an apartment for investment purposes, make sure you get the proper financial and tax advice.
The first and most well-known area where investors can reduce their tax is the ability to claim interest charged on loans as a tax deduction when the accounts in question are used for investment purposes.
This is not just limited to property, but in this case the tax deduction could include accrued interest through a mortgage on an investment property.
For example, a $500,000 mortgage for an investment property, assuming interest on the mortgage is 5% per annum and paid monthly over 30 years, an investor would pay approximately $15,500 in interest for this loan.
This figure can be used as a tax deduction to offset the cost of your investment property.
Other costs associated with the loan, such as loan origination fees, account maintenance fees, mortgage insurance fees, mortgage registration, mortgage brokerage fees and stamp duty on the loan, can be used as deductions.
Another area that investment property owners can benefit from is claiming expenses related to the apartment or house purchased. Legitimate expenses include corporation fees, council fees, utilities, insurance and property taxes.
Costs associated with marketing the property to tenants, such as advertising and estate agent fees, may be claimed as legitimate expenses.
Similarly, costs related to maintaining the property – cleaning, gardening, necessary repairs and upkeep – can be claimed to reduce your overall tax liability.
A common deduction, particularly for new apartment investors, is the depreciation of various fixtures inside an investment property, including items such as lights, outlets, windows, kitchen sinks, kitchen and bathroom facilities and even the showers, all of which are subject to depreciation.
Developers will sometimes provide a schedule, certified by qualified surveyors, to help calculate the cost of depreciation of plant and buildings, as the value of these assets declines over time.
Depreciation rates can vary from 2% to 4% of the price paid for the buildings and their assets, which can be used to claim tax deductions.