The Tax Changes – are they making you worried about your future losses or is it back to fundamentals in property investment.
I would say that very few people enter the world of property investment thinking foremost about the way that they will benefit from being able to depreciate assets and thereby gain an annual tax rebate.
I would also hazard a guess that most people think that they will buy this property at this price, set the rent to cover the mortgage and expenses and because we still believe that property goes up in value year to year, at some point in the future the property will be sold for profit. This could be anything from five to twenty-five years down the line, and may be part of a superannuation scheme. The taxation implications don’t really come into this equation as essentially the tenants pay the mortgage and expenses – this is what most people believe when they enter this market and if they have stuck to the fundamentals of property investment – good location, solid property, good cash-flow they will be fine with the new tax arrangements.
The knowledge that income will occur from depreciation usually comes to the novice investor as a minor and welcome surprise following a year of worrying about whether the investment was a good idea or not. It’s something back at least.
Up to now (April 2011) investors have been able to claim depreciation and have losses counted against other income and taxed accordingly, which mostly results in an IRD cheque. Over the years, investors have probably relied on this income as a direct benefit of having an investment property – it looks like income, smells like income and you can spend it.
In actual fact in the broad sense, it is not really income, it is merely like a loan and when the underlying asset is sold – the depreciation recovery steps in and you have to pay it back – at your tax rate.
In the new tax scheme, you will not be able to claim depreciation losses against income any more. If your fundamentals are right, you may be making a small profit, maybe even considering a rent increase in the current market and you will be thinking about how to protect your asset in the long term. For you the best advice is a visit to your accountant to look at the figures and the options of transferring to a trust, or becoming an LTC. Under the new structure an LTC (Look Through Company) will be your best option if you are running at a loss. An LTC will enable you to offset the company’s losses against your other income, and if the company makes a profit, this will be apportioned and taxed as income.
Whatever you choose to do, if in doubt, talk about it. Ring us to discuss your options. There are hidden costs in some of the changes that are quite substantial. There are also the questions of provisional tax, asset protection and mortgage restructuring that may come into the mix. Best advice is to talk to one of our accountants; we deal with these matters on a daily basis and will put you on the right path.