Let’s talk about how an investment property can affect your tax. The first thing to understand is that the rent you receive from a property actually increases your tax. On the other hand, all the expenses associated with holding the property, including the ever-so-valuable ‘depreciation’ are tax deductible, reducing your taxable income. This results in you getting a tax return.
Let’s put it into practice…
For this example, let’s say you earn $90,000 per year. Let’s also say you own an investment property worth $400,000 with a $360,000 mortgage. You rent the property for $400 per week (or $20,800 per year).
Firstly, the ATO will add the rent received to your income. This makes your income $90,000 + $20,800 = $110,800.
At this stage, if you had no deductions to subtract, you would be liable to pay 32.5% tax on the extra $20,800 you received in the form of rent.
Fortunately, you will have plenty of deductions to cancel out the rent received and take your “on paper” taxable income below what you have been taxed on, so you can get a refund.
Tomorrow we’ll cover how to reduce your tax on your investment property’s income.
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