Generally, when people purchase investment properties they only think of one part of the investment which is the rental return.
But there are multiple benefits to owning an investment property:
Firstly, when you find a tenant for your investment property you receive an income known as a rental income. Rental income supplements your regular income, and as such is assessed by the ATO as part of your income. As a result, most people offset this by negatively gearing the expenses (including interest, depreciation, etc) against their income. This can be a very effective way to maximise the power of your earning dollar (by minimising tax).
A key factor in reducing your taxable income (and hence paying less tax) is making sure you take into account all deductible elements of an investment property. Often, one of the largest deductible components is depreciation – especially if your investment property is relatively new (you may be able to depreciate up to 2.5% of the cost of the house excluding the land – but seek professional advice here).
A second and equally important part of property investing, is capital appreciation. One day, you may decide to sell your investment property – perhaps to help fund your retirement. There’s a good chance that if you have purchased a quality investment property, it will have appreciated in value. Hence, when you sell it, you’re likely to make a capital gain. If you keep it for more that 12 months, this capital gains tax is halved (ie. You pay less tax on the gain because you’ve held the investment long term.
So, for example you purchase a property for $ 350,000 and in 15 years when you sell it its worth $ 600,000 so you have made a $ 250,000 gain. Because you have held it for more than 12 months, the capital gains tax is halved (ie. You only pay tax on $125,000 of the capital gain).
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