Financing & Renovating an Investment Property
Some lenders charge a higher rate of interest for an investment property - but many don't. 'Interest only' options are particularly attractive to investors as they allow you to repay the interest on the loan - and not the principal (the original amount borrowed).
There are also 'pay in advance' options which, by paying all your interest on the loan for the next 6 months, allows you to claim a tax deduction in the year it was paid. It is recommended that you see your financial adviser prior to making any decisions on investment or affecting your tax.
What You Can Deduct
Besides interest payments, there are many other deductions you can make against an investment property. These include:
When renovating an investment property, you should seek professional tax advice to clearly establish what constitutes a tax deduction, as not all renovations may qualify.
- Loan establishment fees.
- Building allowance - construction and structural improvements write off deduction of 2.5% per annum
- Outgoings - these include most costs you incur through buying, managing or selling your investment property such as council rates, agent's commission and advertising.
- Depreciation - e.g. carpets, curtains, cabinets, furniture, appliances etc.
- Some improvements made to your property (not all are allowable).
- Cleaning charges.
- Subscription to property journals.
- Body corporate fees.
- Land tax.
- Inspections of the property.
What is Capital Gains Tax?
When you sell an investment property, you may have to pay Capital Gains Tax on any real increase on the value of the property. That is, the difference in the purchase price and the sale price after inflation has been taken into account.
For example: a property bought for $200,000 and sold for $250,000 would have a gain of $50,000. Deduct the inflation rate over the period of ownership (say 5% or $10,000). This would mean the real gain is $40,000, which is the amount on which capital gains tax will be calculated.
If a capital loss occurs, that is your property is sold for less than you paid for it, then the loss can be offset against other capital gains in the year in which the loss occurred. The loss can also be carried forward and offset against future capital gains tax.