Better cashflow makes it easier to hold investment property. The following are a good place to start.
The higher your marginal rate, the higher the amount of tax you can claw back from the tax office to offset your holding costs. Which means more cash coming back to you.
The tax rate for someone on $100,000 a year is 37 cents in the dollar. This means the tax office will refund you 37% of all your expenses associated with your investment property.
If you earn more than $180,000 then the tax office will fund 45% of your expenses. Someone earning less than $87,000 can only get 32.5% back.
So, for the exact same property someone earning $180,000 would get 38% more cash from the ATO than someone earning $87,000.
This means different properties are going to work differently for different people. Which is why just following what a friend or family member did may not actually be appropriate for you.
Ownership should be primarily set up to maximise the amount of tax you can claw back from the ATO. Again, this will be different for different people – the appropriate structure may be solely, jointly, tenants in common or it may be appropriate to set up the ownership through a trust.
How the finance is set up (not the interest rate) can have an important influence on a property’s cashflow.
The appropriate structure can maximise the amount of tax dollars that can be clawed back and can also assist in reducing debt faster.
Many properties will have a level of depreciation available. From a tax perspective, the best way to think of depreciation is tax dollars in your pocket. The higher the amount of depreciation the more tax you can claw back from the ATO.
The highest amount of depreciation (more cash) will be found in new properties whereas older properties will have little to no depreciation (little to no cash).
Recent changes to the tax laws have significantly reduced the amount of depreciation available in older properties.
Stamp duty is generally one of the largest costs associated with purchasing a property but it can’t be claimed as an expense which means the tax office won’t reimburse you for this outlay while you are holding the property.
So, it does little to help you from a tax perspective. It can however be reduced.
Stamp duty is based on the contract price of a property, so if you buy an establish house for $400,000 the stamp duty will be calculated on $400,000. If you instead bought land for $200,000 and built a $200,000 house the stamp duty is only calculated on the land contract of $200,000.
This is just the tip of the iceberg when it comes to cashflow considerations for investment property.
If you are thinking about investment property I'd like to invite you to have a chat with me. No obligation.
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