Forums / Property Investing / Help Needed! / Help with current situation

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  • Profile photo of CalMcCarthyCalMcCarthy
    Participant
    @calmccarthy
    Join Date: 2019
    Post Count: 2

    Hi there,

    My partner and I just recently purchased a property together which we’ll move into in the coming months. This will be my second property, and I’ve decided to turn my existing property into an investment. From this property alone, I’ve budgeted than I’ll be at a loss. Although I’m at a loss, I’ve read that expenses associated with the investment property are tax deductible (?). I’ve estimated that expenses relating to the investment are roughly $15K annually (inc. loan interest payments). Does this mean that $15K is taken off my tax bill?
    Also, I would like to make some minor repairs now prior to leasing it out, would these repairs be tax deductible even though it isn’t yet an investment property?
    I would obviously rather be making passive cash flow off this property, however this isn’t the case for me unfortunately. I’m not sure If I’ve made the right move or not, as losing cash year on year isn’t ideal.

    Appreciate your help, thank you.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Cal,
    There’s quite a bit to it – I suggest you get in front of a qualified adviser before going ahead with this. In a nutshell, there might be better ways…..

    I’ve estimated that expenses relating to the investment are roughly $15K annually (inc. loan interest payments). Does this mean that $15K is taken off my tax bill?

    The short answer to your question above is NO – expenses are not deducted from your tax bill. But expenses can become deductions; they are then subtracted from Income and less Tax is paid because of that lower Income. Of course, rent is added and that increases your Income too. Tax will be paid at your Marginal Rate after Income and Expenses have been applied to arrive at your Taxable Income.

    A simple example for your understanding:-
    You have a rental house – you receive rent of $10,000 a year, but have expenses of $15,000. Thus a $5,000 loss. This loss is subtracted from your other Income (presuming house is in your personal name) – e.g. you earn $80,000 as a PAYG worker. So taxable Income is now $75,000 and you pay less Tax because of the lower Income. Marginal Tax Rate is 32.5% (not including Medicare of 2%) so you get a Tax Refund of 5000 x 32.5% = $1625

    You might be better off to sell and keep the whole equity gain to yourself (assuming this is your own home, so no Capital Gains Tax would be liable on sale). Then all of the profits are yours to keep, to use elsewhere.

    Note, I am not a qualified adviser, so seek advice from those who are. Who knows – maybe someone else replying will be qualified and can add more value here,

    Benny

    Profile photo of CalMcCarthyCalMcCarthy
    Participant
    @calmccarthy
    Join Date: 2019
    Post Count: 2

    Thanks Benny, really appreciate your response :)

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