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A clever way to earn tax breaks and get an initial foothold in the property market!

Purchasing a property in a developing suburb of growth, whilst living/renting in a different location is a smart way to first establish a property portfolio and is referred to as “rentvesting.”

Case study:

Lucy currently rents a one bedroom unit in Unley for $580 per week. Her work commute is less than 10 minutes and she’s close to the local swimming pool that she frequents daily.

Whilst renting in Unley, Lucy is also saving for a home deposit, but is still a few years away from being able to afford to buy a home in her current location. 

Lucy is eager to enter the property market now, so she looks to the hills with a view to buy a 3 bedroom home in the middle-market suburb of Belair in the Mitcham LGA (South Australia).

A knowledgeable property manager provides Lucy with promising data and insights on the area, proving an ultra-tight rental market with both rent and sales activity rising strongly, will consequently impact property values. A 7% rise in the median house price to $720,000 in the latest quarter of 2021 suggests the rate of price growth is accelerating.

The rental payments from the Belair property will help Lucy pay the mortgage, whilst increasing her equity to buy a property in a different suburb in the future.

BMT Tax Depreciation advises that Rentvesting as a strategy offers valuable benefits in addition to home ownership, these include:

Negative gearing 

Negative gearing is when the cost of a rental property outweighs the incoming rental payments. This is not a bad thing, as one may initially believe. 

When negative gearing occurs, the investment property owner can claim the loss against their personal income for the year, lowering the investor’s taxable income.

Building equity 

A property will build equity over time when you pay down the home loan and through capital growth. The amount of equity is the difference between the value of the property and amount owning on the home loan. 

The equity can be used to borrow additional funds for a variety of reasons, including property purchases, renovations, or other investment opportunities. 

In Lucy’s case this could assist her in purchasing a home closer to her preferred location in the next few years once the investment property builds equity.

Depreciation 

Depreciation is one of the biggest tax benefits available to property investors. 

Depreciation is the natural wear and tear of a property and the assets within it over time. The Australian Taxation Office allows owners of income-producing properties to claim this depreciation as a tax deduction. Depreciation can be claimed on capital works (Division 43), the building’s structure and permanently fixed items, and plant and equipment (Division 40), the easily removable or mechanical items.

One great component of depreciation is you don’t need to pay any additional expenses to claim as it’s a ‘non-cash’ deduction. This is different to other deductions like property management fees and interest repayments as money needs to be spent in order to claim. 

Living the best of both worlds is possible with rentvesting. Organising a tax depreciation schedule will ensure you receive all available depreciation deductions.

Source: https://www.bmtqs.com.au