Property Investment Finance: Video 8
How Properties Reduce Tax
When you own a property it’s important to understand the two form of incomes you get from it.
You have the rent return and the tax return, so it’s vitally important that you understand how they all work, so you can get a much better result on your property by reducing tax.
In this short video, Robbie explains these incomes and how they work to reduce your tax:
Did you know when you earn on investment property you get two forms of income? You have the rent return and the tax return. It’s vitally important you understand how properties reduce tax. Watch this little two minute video and now I’m going to show exactly how it works. If you have a $500,000 property and a very generous $500 a week of rental income, that’s $26,000 a year. If you earn $100,000 a year and then you have that extra $26,000 a year, you’ve got a total taxable income of $126,000 a year.
Now, all of the expenses for this property are fully claimable against your total income. Let me now show you how it works. The loan interest, $22,500 a year. You’ve got your rates, you’ve got your maintenance, you’ve got your insurance, you’ve got your rental management. Basically all of your cash deductions. Every time that there is a deduction for a property, you can claim it against your taxable income. Money has to leave your bank account for you to be able to claim that back. Spend a dollar to be able to claim 35 cents.
Now, there’s this wonderful thing called depreciation. Remember, brand new properties are dripping wet in depreciation. Up to $15,000 in the first full tax year. No money needs to leave your bank account for you to be able to also drive down exactly what your total deductions are going to be. When you total those together, there’s $42,500 worth of deductions. You had $126,000 a year as your total taxable income minus $42,000, you can see now there’s only $83,000 difference.
You’ve already paid tax on $100,000. You should have only paid tax on $83,000. There’s a $16,000 difference. And then when you basically put in there what your nominal tax rate is, you can see that’s you get about $6,500 back in your tax. Two forms of income, rent return, tax return. Understand how they all work, you get a much better result.
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