Whether you’re taking your first steps on the real estate ladder or adding to your portfolio, investing in real estate can be a solid way to build wealth. But that doesn’t mean it won’t cost you along the way.

In addition to the large security deposit for the home loan, you’ll need to budget for a number of expenses, including building inspections, city rates, and home insurance.

Fortunately, there are many ways to reduce the cost of owning investment property. We explore a few of them below.

Use negative gear deductions

The Australian tax system allows real estate investors to deduct any loss on their property from other sources of income, such as wages, salaries or business income.

So if your rental property is operating at a loss – that is, your expenses are greater than the income you receive from rent – you may be able to claim a deduction and reduce the amount of tax you pay.

Claim borrowing costs

Borrowing expenses are the costs directly incurred when taking out a loan for the purchase of real estate. According to ATO, you can deduct the following borrowing expenses at tax time:

  • Mortgage loan insurance
  • Securities search fees charged by your lender
  • Mortgage document preparation and filing costs (including legal fees)

If your total borrowing expense is $ 100 or less, you will be able to deduct the full amount in the income year in which the expense was incurred. If they are over $ 100, you can spread the deduction over five years or over the term of the loan, whichever is shorter.

Loss impairment

Investors can also claim losses incurred by the depreciation. You can claim two types of depreciation:

  • Building: the costs of constructing the building itself, such as concrete and masonry.
  • Facilities and Equipment: Assets within your property, such as dishwashers, rugs, light fixtures, floors and curtains.

To get an accurate estimate, you will need to contact a quantity surveyor. They can set up a depreciation schedule, which will outline the depreciation deductions you can claim when you file your income tax return each year.

It’s a good idea to set up an amortization schedule as early as possible, as the ATO will usually only allow you to backdate the amortization by two years.

Have the right team by your side

An accountant specializing in real estate is a must for investors. They will keep you up to date with any changes in the law that may affect you, help you maximize your tax return if your property is facing negatively, and suggest ways to minimize any risk or liability.

Keep all your receipts

Make sure you keep detailed records of all your expenses related to the property. Your accountant can use them to tell you what you can and cannot claim at tax time.

Another approach is to ask the real estate agent who manages your property to cover any expenses that arise using the rent they collect for you. They can then compile a summary of the expenses on your behalf.

Refinance your home loan

It’s always a good idea to review your home loan every few years to make sure you’re not paying more than you should.

And with mortgage rates currently at historically low levels, it shouldn’t be too difficult to take advantage of the ongoing rate war between lenders and refinance to a more attractive deal.

At the time of writing, the average Investor Floating Rate (P&I) in our database is 3.57% pa. Meanwhile, the lowest floating rate is currently offered by the Queensland Country Bank at 1.99% pa (compare rate of 2.38% pa *).

Capital gains tax exemptions

If you ultimately decide to sell your investment property, you will have to pay capital gains taxes. This is the difference between the amount you paid for the property and the amount you sold it for.

All properties bought and sold within 12 months will be taxed at the full CGT rate. But if you have owned real estate for at least 12 months, only 50% of the profits will be added to your taxable income.

So if a property you’ve owned for more than 12 months makes a profit of $ 100,000 on the sale, only half of the net capital gain – $ 50,000 – will be subject to income tax.

Do you want more information on buying an investment property? Browse our range guides or visit our investment home loan comparison page to start shopping for a loan.

* CAUTION: This comparison rate only applies to the example (s) given. Different amounts and terms will result in different comparison rates. Costs such as redemption or prepayment charges, and cost savings such as fee waivers, are not included in the comparison rate but can influence the cost of the loan. The comparison rate displayed is that of a guaranteed loan with monthly repayment of principal and interest of $ 150,000 over 25 years.

** The initial monthly repayment figures are only estimates, based on the advertised rate, loan amount and term entered. The rates, fees and charges and therefore the total cost of the loan can vary depending on the amount of your loan, the length of the loan and your credit history. Actual repayments will depend on your personal circumstances and changes in interest rates.

^ See information on the Mozo Experts Choice Home Loan Awards

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