Some people treat owning an investment property like a hobby when in fact it should be treated like you are running a business. Having a realistic budget and a business plan are crucial.
Purchasing an investment property is exciting. But before embarking on this experience, it’s important to seek your account’s advice.
It is important for would-be investors to know that the tax implications of buying a property and the cash flow outcomes are two separate issues. People should ask their accountant what they need to do to maximise the tax outcome. Another issue to clarify is who is buying the property: a single individual, a couple or an entity?
You and your accountant need to work through a budget in relation to what the scenario is after purchase. The budget should allow for the costs and should also include the cash flow of borrowing on an interest-only basis. Doing this with your accountant would allow you to see things that you probably have not considered.
There are several ways to buy property and each has different tax outcomes. Your current financial situation must dictate whether you purchase in your own name, a company name, as part of a superannuation or family trust.
Gearing: What’s the amount you need to loan? Negative gearing is presently a controversial political issue, so you should find out how it can benefit you. Are the tax breaks of negative gearing ideal for your financial situation or should you stay away from any risk?
Depreciation: Which can work to your advantage: purchasing a brand new property with high depreciation allowances or an older property you can renovate? You are entitled to a depreciation of the renovation expenses over a set period of time. Learn how a depreciation schedule can benefit you and how it makes negative gearing tax positive.
Renovations: Understand the difference between repairs and renovations. Any renovation or repair you do immediately following settlement is regarded as capital works. Learn the difference between capital works and expenses.
Budgeting: Ask your accountant for help in creating a simple budget and plan. A number of items in a property will have to be continuously replaced. It can be expensive when you re-paint and install new carpeting, and you have to do this every five or 10 years. Don’t allow your property to become shabby due to your failure to take costs into account.
For more information contact your accountant or ask Annette for help.