What to consider when buying an investment property
BUSINESS OPINION: The X-Factor with Tina Zawila, of Sothertons Gladstone:
AT this time of the year we meet with many clients who own rental properties and are keen to have their income tax returns prepared and lodged so they can access their tax refunds.
There has also been lots of talk in the media about the suggestion the government may abolish negative gearing in the future.
Before we talk tax, let's talk about the fact that purchasing a rental property is a major investment decision.
Like all major decisions, careful thought should be given to the worthiness of the investment before signing the contract.
As a minimum you should consider the following issues:
Rental returns - what is the current state of the rental market?
Capital growth - what are the long term prospects for the property?
Funding capacity - can you manage rental expenses, including loan repayments, if the property is untenanted for a period?
Liquidity - how long will it take you to sell the property if you need to realise your equity?
Comparison - how does the investment compare with alternatives such as shares, managed funds and listed property trusts?
You will note that tax isn't mentioned in the list above, and the reason for that is that "saving tax" should be an added bonus.
So what is negative gearing? Quite simply, it is where the expenses exceed the income received.
This net loss can be offset against other income in your tax return, reducing your tax payable, or creating a tax refund.
The amount of the tax benefit is essentially the net loss multiplied by your marginal tax rate.
The higher your marginal tax rate, the higher your tax benefit from negative gearing.
Remember, the difference between the tax benefit gained and the actual loss on the property comes out of your pocket. In order to break even, the property must be growing in value by at least your out-of-pocket costs.
For more information phone Sothertons Gladstone on 4972 1300.