Understanding Tax Deductions As a Property Investor
Maximum tax deductions for the passive property investor, means that your investment should be new or nearly new. Being new, a property will also be more attractive to tenants and will require very little initial maintenance.
This “new” may be a completed refurbishment. A good refurbishment will strip a property completely, and replace it with brand new fixtures and fittings allowing full depreciation on them. The result will be a new property on original foundations.
The idea of being as new as possible is to gain as much help from the Government by way of tax deductions through legitimate depreciation of your investment.
Understanding the tax deductions of property and realising their value could lead one to think that Tax is beautiful!
This of course is a controversial statement, but I am specifically referring to the allowable tax deductions on property investment here.
When you understand and then learn how to use tax deductions, you will realise the beauty of them. This means that you should be aware of every deduction allowed for your investment and fully claim these deductions as soon as you can. This will minimise any holding cost of your investment by maximising your cash flow. This means you are able to invest again sooner.
The monetary difference between investing into the right or wrong property is huge. Unfortunately I see all too many people all of a sudden decide to invest in property and off to the nearest real estate agent they go in search of a lovely house. Can I say, if you are ready to invest now and are really thinking todays the day, STOP! Make sure of two things:
1) Make sure the person you speak to can explain what I am talking about here.
2) Make sure they can give you a computer print our of a Property Investment Analyses of all the costs and depreciation calculations of a said property.
If you can't get the answers to the above two questions then have a chat to these guys about these and other property expenses before you invest.
Beautiful cash benefits now!
You can get cash benefits now from your non-cash deductions by using a form better known as a 221D or the new term being PAYG Withholding Variation. Don’t let this term confuse you. The old “221D” “PAYG Withholding Variation” under “Section 15-15 of Schedule 1 of the Tax Administration Act 1953,” is Tax office talk for a Variation of Tax Instalment Deductions form that you must fill out to obtain a tax variation to your weekly pay.
This means your employer deducts less tax from your pay. If self employed you pay less PAYG instalments.
Instead of waiting for an annual tax return on your deductions, you get them weekly. Simply fill out and return this 221D form to let the ATO know what your expected expenses are likely to be from your investment property this year. It is wise to have your accountant do this for you.
The expenses are processed by the ATO and they notify your employer to reduce the tax deducted weekly.
This is beautiful real cash. To claim deductions as you get paid, this 221D form has to be submitted every financial tax year (1st July to 30th June.) These deductions increase your take home pay each week and contribute to the cash input required in servicing your loan.
Check out the Australian Tax Office for further information about
rental property and tax deductions
(opens in a new window)
Or click here to check out the guide that explains when and how you can vary your
rate of PAYG withholding tax
(opens in a new window)
Think of it like this:
Capital growth from appreciating property creates real wealth for you in the future.
Allowable deductions for the decline in value of depreciating assets (See: 'Deduction for the decline in value of depreciating assets defined' in my booky) create cash benefits now, which you can use to support your mortgage.
Does it get any better than this?
These benefits plus the tenant’s rental payments, and perhaps a small justifiable contribution from yourself, pay all your investment costs.
This is what allows you to build a property portfolio with minimal affect on your lifestyle.
This is really getting your money to work for you in a very efficient way.
Note that the Australian Tax Office acts on the instructions they receive. Accuracy in the projected expenses that you provide to the tax office is important and the amount claimed must exceed $500.
It pays to estimate low on your variable claims. The balance can be claimed when the actual amounts become known at tax return time.
On the form they say: “False or misleading information could result in prosecution and penalty. The commissioner may seek further information from you before or after the processing of your application.”
Be conservative, you will claim it all eventually, no one needs an almighty row with the taxman.
The tax office does not allow us to avoid tax, but it does allow us to arrange our affairs in a legal and legitimate manner to minimise the amount of taxation that we pay.
This is not tax avoidance!
It is understanding what your property operating expenses and depreciation allowances are and then claiming your legal entitlement. You do not need to be rich to do this. You can do it on any taxable income.
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