Should you Invest in Property Just to Save on Tax?
Dilleen Property Group 2023
There are many different expenses that come with owning investment properties. Some of the fees you will expect to pay include:
Council rates
Water rates
Management fees
Repairs and maintenance
Body corporate/Strata (Units, Villas and Townhouses)Insurances
Interest on your repayments
Fortunately, most of the expenses you pay as an investment property owner can be claimed back at tax time. Additionally, if your property happens to be negatively geared, the loss can also be used to offset other parts of your income and reduce your overall amount of taxable income.
Should tax benefits be your sole purpose for property investing?
It can be dangerous to invest in properties if your sole purpose is to only receive tax benefits. This mindset can lead you to focus on properties without a beneficial long-term strategy, and instead result in purchasing negatively geared properties with mediocre numbers and higher financial risk. Some agents emphasise the benefits of tax deductions to sell Off-The-Plan properties, New House and Land Packages or negatively geared properties. These properties likely won't service themselves financially over time due to their low rental yields and inflated over market value prices.
Unexpected Unemployment:
The concept of purchasing a property just for its tax benefits is similar to paying one dollar to receive a 30-cent return. This mindset can cause issues later on with serviceability. Additionally, if you were to suddenly become unemployed the property will not be able to perform its sole purpose of providing you with tax deductions. Instead, the property will begin to dissolve funds from your personal account due to it not servicing itself. Worst case scenario, you may need to offload the property quickly and likely won't make any money on it due to the urgent nature of the sale.
Advice for beginner investors:
It is crucial to ensure that you pick a property that can financially cover itself when something unexpected arises. Rather than focusing on the fact that negatively geared properties can reduce your taxable income, you should aim for neutral or positively geared properties. Purchasing properties with a high rental yield is crucial as it provides a financial buffer in case something goes wrong in the future. The goal is to have the rent cover the repayments and even better if there are extra rental funds left over to cover other associated costs. This strategy may be the difference between selling your property at a loss due to a dire financial position and holding onto your property long-term, benefitting from rental returns and compound growth effects.
Conclusion
Tax benefits may sound like a great bonus to property investment, but they should not be the main priority. Nearly any investment property will be able to provide you with tax deductions however not every property is able to cover itself financially when unexpected issues arise. In order to reduce financial risks for yourself, it may be a more beneficial idea to select properties that are either neutral or positively geared with a high rental yield rather than brand-new properties that may offer more tax benefits but higher financial risks. If you require assistance getting started with property investing or have an inquiry, feel free to contact us here to learn more about our services and investment strategy.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
