Establishing the right investment and finance structure is critical to the long-term success of any property acquisition.
I recently spoke with Ty Beveridge, accountant from Kindle Partners who advises it starts with your very first home that might one day become an addition to your own wealth generating investment portfolio.
“Some people decide to convert their own home into an investment property in the future. Seeking advice at the outset when you’re contemplating such a move is crucial, so that you don’t miss out on future tax deductions.”
So let’s explore how you can establish the right ownership and debt structures from the outset, in order to reduce your risk exposure whilst maximising your all important investment dollar and allowable tax deductions.
It doesn’t matter how much research you do into loan packages or lenders, unless you are a professional working in the cutthroat world of finance, never assume you can go it alone.
“It is really important that you speak to (a mortgage broker, adviser or accountant) before you place the deposit down on a property, so that you have your debt structured correctly from the outset to make sure that you’re maximising your tax deductions on that borrowing,” cautions Ty.
An expert will guide you throughout the process, ensuring that each step is taken only after careful consideration of your personal circumstances and long-term goals when it comes to property ownership.
“If you used cash for the initial deposit of say 10%, then you’re potentially not going to get the full tax deduction that you might otherwise have received. Get that right at the outset by speaking to somebody before you sign on the dotted line,” says Ty.
“Once you are ready to settle or you’re moving towards settlement, make sure you have the loan structured correctly from a principal and interest perspective. Also have somebody look at the options of fixing or variable (interest rates) in light of your overall position, so that you’re not overcommitting and missing out on opportunities in the future.”
This is critical for investors who need to be mindful of their cashflow.
As a professional property investor, you want to structure your finance arrangement(s) to maximise your borrowing power now and into the future and minimise any out of pocket contribution.
Ideally, you will pay nothing at all to service the loan once it’s established.
This is particularly important when you’re still in the accumulation phase of your investment endeavours, and are likely to have what we refer to as “bad debt” – the mortgage over your own home – which you should aim to pay down as quickly as possible, whilst capitalising on your “good” investment debt, where the government provides you with that extra negative gearing incentive.
Make your debt work for you
Ty says a major consideration in this optimal debt-constructing scenario, is whether you have any intention of converting your own home into an investment property in the future.
“We have seen a lot of clients who have almost paid their initial (home) loan off, and then moved into a new home over which they have a substantial borrowing and effectively no tax deduction on that debt,” explains Ty.
“Whereas if they structure it correctly from the outset, with something like an offset facility, they can take their money into the new home and only have good debt, being the tax deductible loan on what is now an investment property that used to be their home.”
Land tax savings for the savvy investor
Interestingly, many people neglect to consider the ongoing cost associated with holding property when establishing an investment loan. And the cost that takes the unsuspecting investor by surprise most often is land tax.
“When you are looking at ownership – be it an individual, super fund or trust – consider the stamp duty and land tax costs that are potentially attached to that particular structure,” says Ty.
“As an individual, you have a substantial threshold before land tax is payable, whereas other entities don’t necessarily have those thresholds. Likewise, if an individual already has an investment property in their own name, your land tax bill could become expensive if you put another property in your own name, as opposed to having it in your spouse’s name, who is not attached to another investment property title.”
Given that electing to adopt this type of strategy for your ownership structures could save you a few thousand dollars each year in land tax obligations, this is definitely something you should consider from the get go.
Do you appreciate the benefits of depreciation?
One of the things we find here at Intuitive, when investors approach us to assist with refinancing or implementing a new arrangement, is that they are underutilising the taxation incentives available to them, particularly with regard to depreciation schedules.
Depreciation schedules are written by quantity surveyors, who assess the value of your property’s assets and the potential cost to replace them should the need arise.
“Provided the property fits within certain construction dates, depreciation can be a substantial benefit,” agrees Ty.[sam id=50 codes=’true’]
“And it’s not only a property that may have been wholly constructed after, say 1987 that should have a depreciation schedule drawn up. It can also be a property that has had renovations done since that time.”
Ty says this means receiving deductions on two fronts, being the “building write off” – the cost of wear and tear on the property’s structure – and depreciation on fittings and fixtures such as wiring, lights, furniture and the like.
“A quantity surveyor will come out to your investment property, do an assessment and prepare a report for you, which will provide a break down of those depreciation items that you can claim each year,” says Ty.
“If you find the right quantity surveyor, who has a strong relationship with your advisers, he or she will assess your property at no cost if they determine there’s no claim to make. We have seen the benefits of depreciation schedules go into many, many thousands of dollars over the ownership period of a property.”
Of course, as with many property investment related expenses, the fee to engage a quantity surveyor is also tax deductible. So there’s really no reason to not have this done and potentially save thousands on your annual tax bill!
Find the right help
Ultimately, if you establish yourself as a professional property investor, the best way to optimise your portfolio is to ensure you surround yourself with the right advisers and maintain strong, working relationships with them.
Your rapport should be based on trust, and you must feel comfortable enough to ask any questions upfront when contemplating the establishment or alteration of any type of investment or debt structure.
After all, a dollar saved is a dollar earned!