Take advantage of tax benefits
Yes, there are costs involved in becoming a property investor. However, you can claim deductions on expenses related to your investment such as interest payments, maintenance costs, landlord insurance, property management fees, body corporate fees, and legal fees. This can significantly reduce the amount of tax you are liable to pay, allowing you to keep more money in your pocket.
Here are the most common tax deductions for property investors:
Depreciation: Depreciation is also a huge benefit for investors and can help to reduce your taxable income by claiming depreciation on your property’s structure and fittings.
Expenses: While buying an investment property involves continuous expenses, you can claim them as a tax deduction against your rental revenue. This means that at the end of the financial year, you can deduct expenses like council and water rates, property management fees, bank charges, and utilities used by your tenants from your rental income.
Negative gearing: If your rental income from an investment property is less than the interest you pay on your investment loan, then you may be able to reduce your taxable income by claiming a negative gearing tax deduction. This can help to transform a ‘loss’ on paper into a real tax benefit.
Defer or halve CGT: When you eventually sell your investment property, you may be liable to pay Capital Gains Tax (CGT) on any gains made. However, if you have held your investment property for at least 12 months, you can receive a 50% discount on capital gains tax payable on any profit you make. If you keep your investment property instead of selling it, you can choose to defer the CGT liability until you do eventually decide to sell.
Compound your wealth
Compounding is the process of earning returns on returns, and when it comes to property investment, compounding can help you accelerate the growth of your wealth and build a secure financial future. By reinvesting the money you make from rental income, capital growth, and tax benefits back into property, you can multiply your wealth exponentially.
For example, let’s say you purchase a house for $500,000 and over the next five years it increases in value to $700,000. You can leverage the equity gained to purchase a second property, which in turn can increase in value and be used to purchase a third. So with just one initial investment, you can create a diverse portfolio of properties that have the potential to generate exponential wealth.