This is a simple guide only; we recommend you consult your financial advisor before considering any purchase. Taxation The Australian Government encourages property investment by supplying generous tax deductions. Basically these tax incentives occur in 2 ways, expenses and depreciation every deduction whether it is an expense or for depreciation will earn a refund or a credit. A refund if you are a payg employee, (pay tax as you go) or a credit if you Self employed.The actual amount depends on what your taxable income is. Australian Tax rates 2006-07 Taxable income Tax on this income $0 – $6,000 Nil $6,001 – $25,000 15c for each $1 over $6,000 $25,001 – $75,000 $2,850 plus 30c for each $1 over $25,000 $75,001 – $150,000 $17,850 plus 40c for each $1 over $75,000 Over $150,000 $47,850 plus 47c for each $1 over $150,000 The above rates do not include the Medicare levy of 1.5%. 1. Expenses (not improvements) incurred to own the investment property The cost of the interest you pay on the money you have borrowed to own the property (not the principal that you may have paid), The cost of managing the property, The cost of accountancy for the property. The costs of repairs (not improvements) are tax deductible. Example: At end of financial year you have spent $15,000 on expenses you may legitimately claim this as a tax deduction. Please see warning note below:  repair to a property V's improvement to a property. 2. Depreciation unfortunately often missed by investors as a legitimate tax deduction. Depreciation occurs in 3 ways as described below, as a rule of thumb the newer the property the more depreciation allowances, most property's will have a combined depreciation allowable as a tax deduction of between $3,000 and $25,000 (even more in some cases) if your tax rate is 48.5% this means that the AT0 will refund you between $1,455 and $12,125 even if the property is already cash flow positive, now that's what I call a great incentive! So how do you find what you are legally allowed to claim for depreciation? Employ a licensed quantity surveyor, they will create a depreciation schedule (cost around $450) the schedule will map out what you are legally allowed to claim, the ATO will accept the schedule to be a true guide to your allowable depreciation, give the schedule to your accountant who will keep it for deductions in this year and in years to come and should update it for you should you add improvements etc. to the property. a). Depreciation of the Building, As a rule of thumb you can claim 2.5% of the cost of the building each year for the first 40 years of the buildings life. Your quantity surveyor determines the cost of the building in the year it was built. Example: Building costs are deemed $100,000 you get a tax deduction each year of $2,500 until building is 40 years old. b). Depreciation of Fixtures and Fittings, Many items in the property are deemed fixtures and fittings (or plant and equipment) these have a lifespan, such as curtains for instance. The quantity surveyor determines the worth of the item at this point in time, the ATO supplies a guide to what an items lifespan is, that item is then depreciated at the rate of it's lifespan from when you buy it. Example: Curtains cost $1,500.. now worth $1,000.. lifespan 5 years.. = tax deduction of $200 each year for 5 years. (Prime Cost method) Buying a property with Furniture largely increases depreciation deduction as all furniture items are deemed as fixtures and fittings and have a lifespan, hence are depreciable at a rapid rate as fixtures and fittings. Please note: there are 2 types of ways to claim depreciation on fixtures and fittings (plant and equipment) 1. Diminishing Value (will give you higher deductions in early years) 2. Prime Cost Method (Easier to work out as equal amounts of deductions each year throughout the said life of item) Your quantity surveyor works out both examples on your depreciation schedule for you c). Depreciation on buying costs,another deduction many investors sadly miss, Hereyour buying costs are added together and can be claimed equally over a 5 year period. These costs include Bank application fees, Valuation fees, Stamp duty on loan, Solicitors Fees, Mortgage insurance Example: Total buying costs comes to $5,000 you get to claim $1,000 each year for the next 5 years Writing off depreciation Let's say you decide to buy a property that's a little run down, you believe that if you spruce up the property that it will not only add capital value but you can achieve a better rental figure (rightfully so in most cases, see improving rental returns) So you pull up the carpet, lay timber floor boards Pull down the curtains and put up timber shutters Get rid of the outdated furniture and replace it with new funky furniture The improvements that you make WILL NOT BE TAX DEDUCTIBLE HOWEVERall those items mentioned that have been pull up and thrown out can be written off, as long as they are depreciable as fixtures and fittings and have some value in your depreciation schedule, if your depreciation schedule says these items still have a value of $10,000 or $20,000 then You may have a $10,000 or $20,000 TAX DEDUCTION writing these items off. PLUS the new items go into your depreciation schedule at the value you paid for them, so now you have a higher depreciation this year and coming years. PLUS the "higher rent" you are now getting is helping to pay off the improvements. (if the higher rent is more than the repayments on the improvements you may even be making a profit, often is the case with holiday/lifestyle apartments, see improving rental returns)  PLUS the interest on the amount borrowed to do the improvements is tax deductible. PLUS the capital appreciation that you have received may have put you in a position to buy another if you wish. WARNING:Always consult your financial advisor or accountant before planning improvements as only items that are listed on your depreciation schedule if replaced or improved can be written off. An item deemed to be part of the building will not be written off, but will be slowly depreciated at a rate of 2.5% per year. WARNING:Repair V's Improvement to a property. An easy example, your tenants stove doesn't work, so your manager arranges for it to be fixed. Outcome 1. The problem was a hotplate so the element is replaced, REPAIR is tax deductible. Outcome 2. The problem was a little more serious and the stove needs to be replaced, this is deemed as an IMPROVEMENT and is NOT tax deductible but is depreciable over the deemed life of the item.  This is a simple guide only; we recommend you consult your financial advisor before considering any purchase.     For more information on Taxation click here