What questions should I ask my Accountant before buying an investment property?
Successful property investing can be a fantastic, tax-effective investment, however, buying an investment property is not a simple task without due consideration of many associated impacts, and is one investment that may not result in immediate success.
Furthermore, as a property is a physical asset, it requires constant, active management, so in many ways it is likened to running a small business. Therefore, before embarking on property investment, it is worth considering whether you are actually up for this.
In this Blog we explore some of the detailed tax topics for consideration before making the ultimate decision, and recommend consulting appropriate professionals such as a Financial Adviser, Accountant, Quantity Surveyor, Lawyer, etc., to carefully examine the below topics in relation to your own objectives and circumstances.
What is negative gearing?
Negative gearing refers to a situation where total expenses of an investment exceed the revenue earned from the investment, therefore resulting in a loss being incurred.
So if making a loss, what is the attraction to, and why does “negative gearing” gain so much attention?
It has to do with being able to offset these losses against other sources of income (to ultimately reduce your overall taxable income). This is only possible by choosing the right ownership structure from the beginning, therefore best to seek specific advice from a professional and set up the most appropriate structure well before making any investment(s).
Ultimately negative gearing is accepted or tolerated by the Investor on the assumption that capital growth will make up for these tax losses in the long run.
What ownership structure should I choose for my investment property?
This is an often overlooked but hugely important consideration as one’s objectives, current situation, and expected future situation, do impact on the overall choice, not just tax minimisation right now.
Typical ownership structures are:
- As Individual(s)
- Trust (Unit, Discretionary, SMSF)
Therefore, there is a need to consider the following (non-exhaustive) points in association with appropriate professional(s):
- Plans for the property
- Negative gearing per above
- Capital Gains Tax
- Asset protection
- Other assets, shareholdings and business interests
- Legal and beneficial ownership
- Survivorship (how one’s interest passes to another on their death)
Am I better off buying a brand new or older property?
This question is often asked in relation to depreciation allowances available to property investment.
Depreciation is an allowance in relation to the decline in value of an asset, and being a non-cash expense, is a way to legitimately allow and deduct for such devaluation.
As eligibility and rates differ according to construction dates, the types of assets (e.g. Capital Works, Plant & Equipment), and changes in legislation already effected, this takes a little more detailed examination with a professional adviser, typically a Registered Quantity Surveyor, except to say that generally, as newer properties cost more to construct in today’s dollars rather than the historical cost of say a building constructed twenty years ago, newer properties generally attract higher depreciation amounts.
As depreciation is just one component in the overall profit or loss equation, investments should not be made on the basis of tax effectiveness alone, but rather the overall, net or after-tax yield, capital gain, and objectives.
Do I need a tax depreciation schedule?
If you are wanting to take advantage of depreciation deductions per above, then yes, this is needed for already constructed (2nd-hand) buildings.
For new buildings where substantiation documentation such as tax invoices and construction contracts with inclusions costs are able to validate actual costs paid, then these actual costs may be used, but for already-constructed buildings, a calculation of building construction costs and inclusions (Plant & Equipment) is required. This may only be obtained through a handful of professionals, most commonly obtained from a Quantity Surveyor.
Their businesses are specialised and geared-up to quickly and efficiently provide this information (report) at a reasonable price, not to mention the cost of such a report also being deductible.
Should I have a budget for fair wear and tear on my property?
As mentioned earlier, a property is a physical asset, so appliances, general fixtures and fittings such as flooring, curtains, and bathroom & kitchen fixtures and fittings, like at any property, will require repairs, maintenance and/or replacement. Planning for or keeping handy some funds for these costs will reduce the burden of such costs at the time. In addition, a well maintained property will keep quality tenants happy and comfortable, which ultimately increases the prospects for long-term investment success.
Thank you to Matthew Kren from Consolidated Accountants & Finance Brokers for supplying Lot 42 Real Estate with this information.
If you are looking for a dedicated and knowledgeable Accountant, who also happens to be a Mortgage Broker, get in contact with Matthew and his Team at www.consolidatedafb.com.au
^All information in this blog is general in nature, and you should contact appropriately-qualified professionals for specific advice relating to your own circumstances.