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October 23, 2018 | 11:07 AM
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09.05.2018How valuable are tax deductions on property really?


Eligible non-cash items include the special building allowance under Division 43 of the Income Tax Assessment Act 1997 - for example, 4 per cent per annum on non-residential income-producing buildings erected after 27 February 1992. This allowance applies only to buildings, not to land.

Another eligible non-cash item is depreciation. This covers certain assets which have a limited life, including carpets and especially very expensive ones, such as airconditioning and, in some cases, lifts. There are two methods, namely prime cost (straight line) - for example, 10 per cent of the original cost per annum for 10 years, and diminishing value - for example, 15 per cent of the previous year's written down value each year.

Many investors would choose 15 per cent DV over 10 per cent PC because this gives a bigger deduction in the early years of an investment. Estate agents like to stress this, but the advantage quickly declines: for a $1000 outlay, the deduction will be $150 in the first year, $127 in the second year, $108 in the third year, and so on.

For investors using loan monies, interest becomes a tax deduction, in both negative and positive gearing situations. The former arises when the interest exceeds the net rent, creating a deduction equal to the excess. This can be offset against the investor's income from other sources.

Many investors love this scenario, forgetting that not only is there a tax loss but also there is a real loss, which may or may not be offset by capital appreciation in future years.

It should be noted that deductibility is a function of the use of the money, not of the asset which is charged. Thus interest on a loan used to buy an investment property is deductible even if the loan is secured by a mortgage over the borrower's home.

CAPITAL GAINS TAX

Strictly speaking, capital gains tax is not a separate tax. Rather, it is levied as part of the overall income tax system. The legislation affects realised capital gains and losses.

In contrast, unrealised gains by portfolio investors as distinct from traders are not subject to taxation.

Realised capital gains in the hands of individuals are also subject to the Medicare levy.

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