LOCATION, LOCATION, LOCATION OR TIMING, TIMING, TIMING?
Published on October 14, 2015
Depreciation Benefits and Tax Advantages of Property Investing
I am sure we have all heard, and it’s hard to disagree with, the property investing adage of Location Location Location, and of course the resulting capital gain on real estate if often attributable to mood, development, environmental (waterfront) of the location of a property and its surrounding activity.
If you want to take some of the crystal ball out of ‘location’ then a sensible alternative is timing timing timing!
- Timing Of The Market
- Timing On Non Cash Tax Deductions
- Timing Of Capital Gains
Timing of The Market
As I highlighted, location is an important element, but unless you are blessed with pockets full of money, investing in the inner-city, waterfront or beach locations is limited to the wealthy investor.
Often your biggest rewards are from predicting or using the services of a trusted advisor who has put a lot of time and effort into evaluating the growth and activity in a location. More than likely these locations are in their infancy or youth. The time you plan to hold an investment will often play a large part in the capital and rental growth of the property. Make sure you have a strategy, and make sure you are positioning yourself as best possible to be able ride the bumps of any market!
Ideally, timing is buy low and sell high. This is a very successful notion when using real estate as your investment vehicle, but tends to take some time often 5 years plus to really see the fruition of your investment. Often many investors in real estate miss a market waiting for the drop or low, and some are very lucky on their timing.
Be appreciative of the investment cycles. Have a long term strategy and often, anytime is a good time to buy in a future growth location.
Timing of Non Cash Tax Deductions
If you couple your long term strategy with a tax strategy then the cash benefits can be huge! Often this comes in the form of depreciation and special building write off. The best way to explain is to let the numbers do the talking.
If you are a high income earner and you purchase an investment property which over a 5 year period has combined deductions of depreciation and special building write off, of $9,000 per annum. The total tax savings are a massive $22,000 over the 5 year period.
Put simply, on a $400,000 mortgage at 5% interest rate the non cash tax benefits subsidises you one full year of interest.
Timing of Capital Gain
Much loved by many property investors and advisors - you can make a massive gain on your property and use the equity and not pay tax (until it is sold). Hard to argue with that strategy!
Watch what happens if you manage the timing…
Let’s say you have a property with a $300,000 capital gain and you are a high income earner planning to retire in 2 years on your Self Managed Super Fund (SMSF) tax free pension. The numbers tell the story - sell now and the tax is $75,000 or sell when you are retired and the tax is $45,000, possibly couple this with a superannuation contribution strategy and the tax reduces by another $6,000.
If you are worried whether it’s a good time to buy in the market, spend a little time getting some advice, is this a good time for you and your financial position to be buying property?
By Brendan Collins | CPA | Principal, Butlers Accountants
The MRD Partners team of experts (internally and externally) is here to partner with you on your wealth creation journey. Whether you're considering a self managed superannuation fund (SMSF) as a vehicle to invest into property, you want to reduce the taxes you pay, clear your home loan faster or just learn more about what we do... call now on 1300 883 854 or (using the hashtag #investmentadvice) contact us online.
Partnering with you for your investment success,