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Let's think positive

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All investments need to be scrutinised, numbers wise, before your hard-earned money is slipped into a great idea. Buying shares or property ultimately should be tested out on whether it is or isn't a great investment. However, most investments happen because investors think the play is a great idea. It needs to be more than that!

Making the wrong call

Most of us find it difficult to do the numbers on shares because there are so many unknowns. If you need reminding, I'll simply refer to the calamities connected with AMP or Telstra.

A property earmarked for renting to a tenant is a whole lot easier but many investors are not up with some of the inside information on tax deductions for different sorts of property, and, as a consequence, might opt for the wrong property.

The negatively geared story

For novices, when you borrow for an eventual rented property and money coming to you is less than money out to the bank and others on the landlord's costs queue, you make a loss. This is what's called a negatively geared property.

Here the main game is to use tax deductions from the loss to soften the cash flow impact and the big pay off is capital gain.
Now let's think positive

In contrast, when money in outweighs that going out and you have borrowed money to make it happen, it is called a positively geared property. These are generally low-priced properties where the rents are relatively high.

Any examples?

These are gems and there's a whole bunch of Aussies who trawl real estate websites looking for suburbs and towns where this happens. I haven't proved it myself but places like Toowoomba and Townsville in Queensland are often mentioned as such places because of military establishments and universities providing a great supply of tenants.

The traps
Traps with these can be when the military establishment relocates, underlining the importance of doing your homework.
Going from negative to positive

Between these two extremes are those properties, which on one level look like they're negatively geared but when other tax deductions are realised, the bottom line picture swings towards the positive.

These deductions can include fixtures, fittings, furniture and even the costs of construction, which can be claimed for a long time. Of course these are all linked to the 'D-word' - good old depreciation of your assets. These are also called on-paper deductions.

Technical matters

Generally speaking, properties built after 1985 can give the greatest number of deductions but whether you can make it ultimately cash flow positive will also rest on your marginal tax rate and what rent you can extract out of your property.

The role of the quantity surveyor

The experts who play this game often go to quantity surveyors who run their eye over the property and give you a list of things that can be depreciated. I am not talking about only new assets in the rented property. All assets have an effective life for the tax office and this determines what you can claim.

These vary with the assets. For example, blinds 'live' for 20 years while an electric heater has only half that at 10 years. Washing machines live for 6.66 years but refrigerators can double that at 13.33 years.

The ATO does crack down

The tax office can play hardball and have knocked back things such as built-in cupboards, roller door shutters and security doors.

There are some items in rented homes, especially holiday rented homes, such as crockery, cutlery and bedding, which, if under $300 can be claimed in total in the first year.

Want more?

If this has whetted your appetite then you must realise that this is a rewarding play you have to do in company with the tax office. Go to www.ato.gov.au and you can access a document, predictably called Rental Properties, which answers many of the questions you should ask when thinking about being a landlord or property investor. If this is not your skill set, then call us and we will help you.

Published on: Sunday, October 01, 2006

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