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Buying rental properties

Q. I keep hearing that the tax effectiveness of buying a rental property over buying a place to live makes buying a rental property more lucrative. What do you think?

A. The issue is very complex but let me start by arguing that a rental property is easier to pay for because you get cash flow help from the tax office along the way. But if you ever come to sell it, then you face a capital gains tax, but there are ways to reduce the hit of this tax legally. On the other hand, a principal property that you live in does not provide any tax benefits immediately but it’s capital gains tax-free. Also it provides shelter for you while the property investor has to pay rent. If you had ‘free’ board living with parents, you could see the attractiveness of a rental property. Using negative gearing, where the loss on the borrow to buy and rent out deal is deducted from your income, giving you a lower tax bill, it means you can borrow more. You could buy a more expensive property and that could give you more capital gain. If later on you moved into the house, then you could even be better off. If you have to pay rent, you should work out how much better you are off before you go deep into debt with a rental property. By the way, make sure you buy a property that’s easy to rent and where the rent is good for your overall cash flow equation. Do your sums and make sure you make allowances for all of the expenses and potential tenant issues of being a landlord.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, October 22, 2009

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