I’ve lost count of the amount of times I’ve heard someone say to me ‘I’m thinking of buying an investment property because I’m paying too much tax’. This is crazy ladies and gentlemen! What I’m reading into this comment is that tax is the no.1 driver of this decision. Don’t get me wrong. Tax is important. However, with any investment decision the fundamental question that must be asked is ….is it a good investment. Only if the answer is yes do you consider the tax side of things. If the answer is no, then forget it!
How do people reduce their tax with an investment property? They buy a property where the rental income is less (usually a lot less) than the associated expenses (e.g interest on borrowings). This is called ‘negative gearing’. Does spending more on an investment than you earn from it make a lot of sense to you? It doesn’t make a lot of sense to me. The only reason you get a ‘big tax cheque’ back (i.e. reduce your tax) at the end of the year is because the tax office didn’t know you incurred a whopping big loss on your investment until you told them (through lodging your tax return). When the ATO realises you lost money on your investment they redo the sums and work out that you’ve paid them too much tax. They then give you some tax back. Don’t be fooled. A tax refund isn’t the ATO’s money that they are giving you. It is your money that they are giving back to you. And.what you get back in the way of a tax refund is only a fraction of what you lost throughout the year on your investment. I hope you are reading this blog now and realising that buying an investment property simply because you’re paying too much tax is dumb. If you want to reduce your tax make a donation! Believe me its far less risky.
Don’t get me wrong. I am not anti property. Far from it. I think property has a part to play in most people’s investment portfolios. However, only if the property is going to increase in value should you consider buying it. And remember, if the property is going to be negatively geared, then you need to ask yourself is this property going to increase in value sufficiently to compensate for all the years you spent more on it than you received back in the form of rent. If it ticks those boxes then you should consider buying the property. If it doesn’t then you should walk away.