How does owning an investment property affect taxes

As an investment property owner of around 25 years, I’ve been hit with just about every property tax and expense that you can think of.

Hot water systems suddenly stop working.

Air-conditioning units and dishwashers that no longer turn on.

I once received a sky-high water bill that prompted me to do some digging - it revealed a deep, buried water leak that cost several thousand dollars to locate and repair.

The bottom line is that owning an investment property can see you paying a number of unforeseen bills each month.

But, while this might be true, if you buy the right type of quality property in the right location, it can also help you grow your wealth.

And as an added incentive, the expenses involved in owning an investment property help you pay less tax.

Specificity of income tax on investment property

The majority of the costs associated with owning a rental property can be deducted against your regular income tax bill, which reduces the amount of tax you pay overall.

For example,

Let’s say you earn $80,000 a year and in total, you spend $25,000 paying for your investment property, but you receive $20,000 in rental income.

The $5,000 difference between the money you receive in rental income ($20,000) and the money you spend paying for the property ($25,000) is tax-deductible.

That’s $5,000 worth of expenses you can claim against your regular income tax.

That means that the Australian Taxation Office (ATO) would assess your tax as if you’d earned $75,000 instead of $80,000.

So, every week or fortnight, or month, you’ll pay tax as if you earn $80,000, but then when it’s time to file your tax return, you’ll get a refund of any tax paid on the $5,000 difference.

According to current tax rates, that’s around $1,625 back in your pocket.

Not only that, but you can also usually make a claim each year for depreciation, which is an allowance for the wear and tear of the property over time.

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Jason Gwerder
Wednesday, 22 June 2022

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