How Properties Reduce Tax
In this finance series video, Robbie explains how investment properties in Australia can significantly reduce your taxable income through deductions, rental income, and depreciation.
One of the unique advantages of investing in Australian property is that investment properties can generate two forms of income: rental income from tenants and potential tax savings through deductions. Understanding how these tax benefits work can make a significant difference to the overall cash flow and long-term performance of your investment.
When you own an investment property, many of the costs associated with running that property can be claimed as tax deductions. These include expenses such as loan interest, property management fees, insurance, council rates, and maintenance costs. Because these expenses are deducted from your taxable income, they can substantially reduce the amount of tax you pay each year.
Another powerful tool available to property investors is depreciation. Depreciation allows investors to claim deductions for the gradual wear and tear of a property’s building structure and assets over time. Unlike many other deductions, depreciation is often considered a non-cash deduction, meaning you can reduce your taxable income without money leaving your bank account.
When these deductions are combined with rental income, they can significantly improve the financial performance of an investment property. For many investors, the result is a reduction in taxable income and a tax refund that helps offset the cost of holding the property while it grows in value over the long term.
Understanding how tax deductions and depreciation work is an important step in building a property portfolio that supports both cash flow and long-term wealth creation.
Robbie: One of the great things about buying investment properties in Australia is you can have two forms of guaranteed income.
Your property has a rent return from the tenants, no doubt there, Captain Obvious, but it also has a tax return.
What I want to go through here is a really simple understanding of how investment properties reduce tax.
And this is many of you, this either is right now or will be you guys in the future.
You’ve got your first property, it’s worth $650,000, say you’ve got a $450,000 loan on it, for instance, you’re getting $500 a week rent, which is $26,000 a year.
Again, let’s just say you’re on $100,000 a year gross pay, which you then have to pay your normal amount of tax on.
But because you’re also earning an extra $26,000 in rent, if the tax laws weren’t in Australia that says you can claim some of these operating expenses on your tax, you would have a tax bill.
You’d have to pay tax on $26,000, say 35% tax, whatever that’s going to be.
But the great thing about buying investment properties and running a business per se is that all of the operating expenses, including on paper depreciation, which I’ll go through shortly, are fully claimable against your individual tax return.
Watch how much of a massive difference this makes.
I’m going to basically show you now how you get about seven and a half grand back on your tax, sometimes even more.
So say you’ve got the interest on the loan, if you’re doing principal and interest the principal amount is not claimable, but the interest component is.
$2,000 a year for your rates, $1,950 for your rental management, let’s say a couple of thousand dollars a year for your insurances.
But it also includes maintenance and any other of those items that your accountant sees fit as far as being able to have claimable expenses for your investment property.
So they’re the main ones anyway from a cash deduction.
Now when I say cash deduction I mean this — money has to leave your bank account for you then to be able to claim back $0.35 on the dollar for instance.
So it’s not like you get all that money back, it’s all pro rata depending on your taxable income.
But there is a wonderful thing called depreciation whereby — and you’ll absolutely learn more about this during the process of us teaching you about how to go ahead and build a property portfolio — we get a quantity surveyor involved.
They do a one-off report for your property.
You then hand that report to your accountant and you get 40 years worth of claimable expenses on paper where no money has to leave your bank account for your depreciation.
So basically when you add all that up together you can now see that the original taxable income was $100,000 plus $26,000.
$50,000 worth of cash and non-cash deductions means that you should have only paid tax on $75,000.
The differences of those of course are about $24,500 give or take.
35 cents on the dollar as far as that goes, that’s how you get your $7,500 back in tax.
It’s super important to know.
Please watch along one of these other videos coming up real soon where you understand the differences between gearing and cashflow.
When you have two forms of guaranteed income you’re not just relying on the rental income.
You absolutely get plenty of your tax back and it makes a huge difference.