With current interest rates so low and rents at historical highs, there has rarely been a better time to buy an investment property. Richard Sheppard reports.
After claiming negative gearing and depreciation tax benefits, most new investment properties will actually cost close to $10 a week for a person on a taxable income of $70,000 or more with a 10 per cent deposit or equity, or much less if you qualify for the stamp duty rebates.
Essentially, negative gearing means that if the total property costs – such as interest, rates and other expenses – are more than the rent received, the difference can be claimed on tax, so that the tax returned helps to pay the costs.
Here’s an example:
For a $500,000 property with a $15,000 deposit, $35,000 costs and a $485,000 loan, the total weekly holding costs are:
|Interest||(at 5.69 per cent*):||$530|
|Rates||($1,100 per annum):||$21|
|Body Corporate||($2400 per annum):||$46|
|Agent Management Fee:||$35|
|Allowance for vacancy:||$20|
|Total Cost =||$672 per week|
|Less: Rent of =||$500 per week|
|Leaves: Gross cost of||$172 per week|
This is the first tax deduction and is claimed at your marginal tax rate, assuming 38 per cent, so $172 x 38 per cent = $65 tax refund per week (which can be refunded each payday).
Therefore, the net cost is $172 – $65 = $107 (this is roughly how much it would cost if the property was quite old with no depreciation benefits).
*The current three-year fixed rate with a major lender as at time of writing
Depreciation tax benefit
The depreciation estimate for a new property of this value is approximately:
- $230,000 for the building, claimed at 2.5 per cent per annum = $6250 per annum
- ¥ $35,000 for fixtures and fittings, at 20 per cent reducing per annum = $7000 for Year 1, $5600 for Year 2…
Giving total depreciation of $13,250 for the first year = $255 per week. This depreciation is a full tax deduction, so again with a tax rate of 38 per cent, the tax refund is $255 x 38 per cent = $97 per week. Therefore the final net holding cost = $107 – $97 = $10 per week.
The stamp duty rebates available for most new properties would reduce this cost even further, and with many market experts predicting additional interest rate cuts, it is possible that most new properties could have zero cost to hold or even be positively geared within months.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.