Richard Sheppard reveals how a $500,000 investment property can cost as little as $55 per week.
Most people are surprised when they learn just how little an investment property can cost them after they claim their negative gearing and depreciation tax benefits. They are also usually quite amazed at how simple the calculations are and why we weren’t better educated about this useful knowledge at school!
Understanding negative gearing is one of the most powerful pieces of knowledge you can hold as a property investor. It will definitely reduce your fear of the unknown and provide you with a greater understanding of how you can use the concept to guide you on the path to wealth, whilst planning for risks such as interest rate movements or tenant vacancy, as well.
To demonstrate this concept, let’s look at a real life scenario:
Essentially, negative gearing means that if the total property costs – such as interest, rates and depreciation – are more than the rent received; the difference can be claimed on tax, so that the tax returned helps to pay the costs.
For a $500,000 property with a $50,000 deposit, $35,000 costs and a $485,000 loan, total weekly costs are:
| Interest | (at 6.81 per cent): | $635 |
| Rates | ($1100 per annum): | $21 |
| Body Corporate | ($2400 per annum): | $46 |
| Agent Management Fee: | $35 | |
| Maintenance: | $20 | |
| Allowance for vacancy: | $20 | |
| Total Cost = | $767 per week | |
| Less: Rent of = | $500 per week | |
| Leaves: Gross cost of | $267 per week |
This is the first tax deduction and is claimed at your marginal tax rate, assuming 38 per cent, $267 x 38 per cent = $101 tax refund (which can be refunded each payday). Therefore net cost = $267 – $101= $166 (this is roughly how much it would cost if the property was quite old with no depreciation benefits).
Depreciation tax benefit
The depreciation estimate for a fairly new property of this value is approximately:
$230,000 for the building claimed at 2.5 per cent per annum = $6250 per annum
$45,000 for fixtures and fittings at 20 per cent reducing per annum = $9000 Yr 1, $7,200 Yr 2…
Giving total depreciation of $15,250 for the first full year = $293 per week.
This depreciation is a full tax deduction, so again with a tax rate of 38 per cent, the tax refund is $293 x 38 per cent = $111 per week. Therefore the final net holding cost
= $166 – $111
= $55 per week!
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.
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