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It seems that many people are attracted to real estate not only because of the expected investment returns but also because of the tax deductions that this class of assets creates. But this can be a trap.
By Nick Renton
It gives most property investors great satisfaction to know that the Taxation Commissioner is picking up nearly half of every repair bill.
It seems that many people are attracted to real estate not only because of the expected investment returns but also because of the tax deductions that this class of assets creates.
But this can be a trap. Even an investor in the top income tax bracket has to spend $2.15 actual cash in order to get a tax deduction worth $1.00. In any case, the aim should always be to maximise after tax income, not to minimise tax.
Notwithstanding this, there are many legitimate tax deductions specifically available to property investors, quite apart from those of a more general nature.
The allowable deductions fall into two categories: cash and non-cash items.
Eligible cash items include municipal, water and sewerage rates; land tax; fire and public liability insurance premiums; agents' commission; advertising costs when seeking new tenants; cleaning charges and, in some cases, body corporate levies. Such items are deductible to the extent that they are the responsibility of the landlord and are not reimbursed by tenants.
However, the deductible items do not include the costs of renovations and extensions, as distinct from repairs and maintenance made to restore objects to their original condition.
Nor do eligible items include the initial expenditure incurred at the acquisition stage, such as stamp duty and legal fees. These are regarded as capital outlays. However, for capital gains tax purposes they are regarded as part of the cost base and thus reduce the CGT incurred on any disposal down the track.