How to Get the Taxman and Your Tenant to Pay for Your Investment Property

Home-purchaseEven if you fund the whole amount of your property investment, it might be that you could fund your investment for less than it costs to buy a cup of coffee once a week. This is because of something called negative gearing and the way in which tax deductions are calculated in Australia: when this valuable benefit is added to the rental income you make from the property, you’ll find that the tax benefit is huge to your personal cash flow.

Negative gearing

The first thing to note about the Australian property investment environment is that it operates differently than in most other parts of the world. Here we have something called negative gearing. If a property investor incurs costs – including loan interest and most other property related costs – that are greater than the income from the rental of the property, the investor is allowed to deduct these costs from the tax payable on all of their other income and investments.

So, if you buy an investment property that costs more in interest and costs than it makes in rent, you will get a chunk reduced from your tax bill, meaning you’ll take home more from your gross salary (thus compensating for the expense of buying your investment property).

Rental income

Gross rental income is the full amount you receive from tenants, before any costs are incurred. Average rental yield in Australia is around 5.25%, some way above the amount you’d earn by having money sitting in a deposit account.

However, the following example looks at a situation where you don’t use any hard earned cash as a deposit, but rather use some equity that you may have in the home in which you live.

A working example

We’re going to make a few assumptions (as is the case with any example). These are:

  • You earn $115,000 per year
  • Your current home is valued at $650,000
  • You have $350,000 left on your mortgage
  • The investment property is off-the-plan and valued at $596,000*
  • Purchase costs of $22,095 are to be added to the financing

*An off-the-plan property benefits from the maximum tax deductions and depreciation allowed to property investors

The first step is to borrow money against your home, in order to take the borrowing required on the investment property to below 80% of its value – and thereby negating the need for expensive mortgage insurance. Now, as you need to borrow a total of $619,915 (the property value plus purchase costs), you will need to borrow $476,800 against the investment property, and $143,115 against your current property. Let’s make another assumption here, and that is your mortgage interest is set at 5.75% (which is actually some way above the current market average of around 4.7%).

Your interest costs will be $35,645.

Other costs include management fees, council rates, water rates, etc. Let’s call this $10,067.

The total amount of paid costs is therefore $45,712.

Other allowable deductions include depreciation – in this case a total of $18,745 – and loan costs of $364. That’s a total of ‘unpaid’ costs of $19,109.

So, your total costs are $64,821 ($19,109 + $45,109).

Now, on the flipside you receive rental income of $650 per week or $33,124 per year.

So, your cash flow is negative to the tune of $12,588 (rental income of $33,124 – paid costs of $45,712).

However, because your rental income is outweighed by your loan and other costs, you get to offset all of your costs against your tax bill, meaning you get a tax credit of $12,362.I

In a nutshell, here is what your cash position looks like:

Paid expenses and costs Tax credit Actual Cost (per year)
$12,588 $12,362 $226


Get a bespoke example today

Of course, the example above uses a generic investor and investment property (though it is based upon actual figures from a real life example). Every person is different, and every example will be different.

Before you do anything else, contact me today and I’ll show you just how little it could cost you to invest in a property that could be the difference between you achieving your financial goals and working way past retirement. It’s a great feeling driving past a property you own and knowing that the taxman is helping to foot the bill, while your tenant is making up the shortfall.