Appropriate guidance can result in thousands of extra dollars in revenue throughout an investment property. You will pay a high price for bad advice.


To maximise the value of your new acquisition, this article examines the ideal financing structure for an investment property.


What makes the structure so crucial?


Although purchasing an investment property might be exciting, many people need to consider how to effectively organise the acquisition for the long term.


Here, two crucial structure choices must be made: Structures of taxes and loans.


The tax structure of your investment property is crucial since Australian tax legislation is particularly favourable to real estate investments.


Negative gearing and capital gains tax are the two essential factors to consider.


Negative gearingĀ 

When you have negative gearing, your expenses for your investment property outweigh your return on investment.


Say, for example, that the annual rent on your investment property is $20,000. The yearly cost of maintaining your property, including strata fees, council rates, and loan interest, is $30,000. You now have $10,000 more in expenses than you do in revenue, and you can therefore deduct $10,000 from your annual taxable income.


Tax on capital gains

The difference between your purchase price and the asset’s sale price, such as with an investment property, is referred to as a capital gain. You must pay capital gains tax on this profit, which can be deducted from your taxable income.


Consider spending $1 million to purchase your investment property. For $1.5 million, you sell it. It indicates a financial gain of $500,000 for you. This $500,000 is added to your taxable income without CGT exemptions or deductions.


Places to keep investment properties

There are four excellent tax structure possibilities if you want to hold an investment property.


Having a property in your nameĀ 

Typically, the bulk of investment properties is owned under a personal name, a typical structure. When you own property in your name, you are also eligible for a 50% CGT discount later. The disadvantage is that you cannot disperse the CGT to any other family members, and it’s all payable in your name and goes straight to the owner.


Investing in real estate through a family trust

A family trust can be an intelligent way to start accumulating real estate. It would be best if you were mindful of the implications for taxes, though. The most important thing for you to be aware of is that you cannot transfer any negative gearing tax deductions you create outside the trust, and this implies that the tax losses can only be used to offset income the trust receives.


Keeping investment property in a company

Holding investment property in a company allows you to create negative gearing tax deductions that cannot be transferred outside the company, much like a family trust. Therefore, if your investment loses money, the loss will continue to grow within the business until you have other income to cover it.


It’s also important to note that a property held by a company is not eligible for the 50% CGT discount; therefore, you must pay the entire CGT sum.

Owning a property through an SMSF

If you intend to acquire the investment property one day, holding it in your SMSF can be especially advantageous. This is because investments maintained within a super account are exempt from capital gains tax until you turn 65.


What kind of investment property loan is ideal?


We often advise taking out the largest loan possible when buying an investment property, which will often equal 80% of the property’s worth.


As a general guideline, you should borrow as much money as possible on investment properties because the interest is tax deductible.


Offset Account vs. Redraw Account: Which Bank Account Should I Use?


Redraw accounts and offset accounts function similarly. You make more loan payments, and if you need them in the future, you can still access those additional payments.


However, a redraw is unquestionably preferable to an offset account regarding investment properties. The reason for the debt is what makes this situation unique.


Principal and interest payments or interest-only payments should be made?

Although it’s paying you interest, your investment property is still seen as a debt.


Before you begin paying off the debt on your investment property, we advise paying down your first home buyer loan. This is because, in contrast to your home loan debt, the debt on your owner-occupied home loan is tax deductible.


We also advise taking out an interest-only loan against your investment property. Pay special attention to repaying the principal and interest on your mortgage. Again, this is so you can lower the portion of your mortgage loan that is not tax deductible while keeping the debt on your investment property as a tax deduction.


Sometimes, you can make plans for your current house to someday serve as an investment property. This loan might be set up as interest-only in similar circumstances, with any further payments going into an offset account. But because it might be complicated, it’s wise to speak with a financial expert first.


How to make your loan secure


A lender may cross-securitise the properties if you own more than one, indicating that they have two loans and two properties as collateral. However, even if doing so can make it simpler to get the loan, you should steer clear of it.


Cross-securitising two properties make it tough to sell one or refinance away from the lender if you start seeking a better rate. Because both properties are secured, a decision about one affects the other.


The last word

As you can see, it can be challenging to choose the ideal loan structure for your investment property, but it is possible. This is why selecting a knowledgeable team to assist you throughout the process is important.


Directly approaching a bank or mortgage broker unfamiliar with your financial situation or tax options means they will only see one side of the story.