Investment Property

For information of Tax Variation for Investment Property click here- tax variation

Helping people build an investment property portfolio who have never had one.

Clients asking for information on investment property are surprised to learn that an investment property can be acquired for as little as a car payment. We refer to it as the "gap" - the out of pocket amount after receiving rent, paying investment property expenses and obtaining tax benefits associated with negative gearing.

While clients often use investment property to attain financial freedom, before stepping into investment property clients need to be informed about whom they will be dealing with and what they should expect from their accountant.

I know that when interest rates rise the gap blows out. However, time is a very important component of the investment property equation. With time, rent increases operate to reduce the gap. With time, investors' incomes will rise, reducing pressure on cash flows. Every person in Australia with a mortgage was relieved when the RBA reduced official interest rates early in ctober 2008. The 1% reduction reduced the gap by $67 per week (based on $350000 loan, at 9.84% to 8.84%, interest only). With further interest rate cuts expected under pressure from the global finance crunch, over time this will reduce the gap for owner occupiers and investment property owners alike.

Property marketing agents.

In the past, to buy an investment property, investors had very little help and support. In the last decade the process of buying an investment property has radically changed. Property marketing agents have popped up every where. They offer investors opportunities to invest in property and gain financial independence in retirement, backed up by slick marketing campaigns.
In general, property marketing agents have done a good job in getting people into investment property who possibly wouldn't have otherwise done so. In my opinion that isn't necessarily a bad thing. In Australia, there is now over 1.5 mil. investment properties. Many of those investors have enjoyed substantial growth in their investment property.
However, the investment property industry is maturing and changing.
What is the investment property industry.
The investment property industry combines different industries including investment, construction, manufacture, retail, finance and services:
  • Land owners (often mums and dads)
  • Developers
Construction Industry:
  • Councils
  • Quantity Surveyors
  • Town planners
  • Architects and designers
  • Civil construction
  • Building materials manufacturers and suppliers
  • Builders
Property related services:
  • Real estate agents
  • Finance industry
  • Property managers
  • Property marketing agents
  • Solicitors
  • Accountants
(You will notice that financial planners are not included in the above list. The reason is financial planners deal primarily in securities and rarely in direct property.)
As you can see there are many people and processes that combine to form the investment property industry. When investors purchase an investment property and put it to work earning income, a myriad of organisations and people have been coordinated and pulled together to produce every dollar of rent that investment property earns.
The role of accountants.
Of course, we are all aware of recent events in the worlds financial markets where billions of dollars have been written off securities markets. However, over the last decade or so the securities market has enjoyed phenomenal growth, making the financial planning industry very lucrative. For this very reason accountants have expanded their activities to include financial planning. Unfortunately, I believe accountants have done so at the neglect of investment property.
I can site many examples where accountants have neglected clients with investment property.
Several years ago, while reviewing a new client's previous tax return, I identified errors and omissions relating to investment property. I asked the client for copies of other previous returns prepared by the same accounting firm. The same errors and omissions were present in all returns. I amended four years tax returns and obtained an additional $10000 refund for that client.
During consultation with another new client, who was experiencing some cash flow restrictions associated with her investment property portfolio, I asked if she had an Income Tax Withholding Variation (ITWV) in place. She replied - "No. I asked my accountant to do one and he wouldn't." Truth be told either the accountant didn't offer the service or didn't know how to prepare the application.
I can cite many other examples where clients with investment property have simply been neglected by the very profession they depend on. But there are many areas where accountants can actively and effectively help and guide clients who wish to use investment property in their retirement strategies. Some of the services we offer include:
  • Educating clients on taxation and property investment;
  • Property investment analysis (PIA) - with the help of specialist software, analysing investment property growth, costs, income, impact of finance and interest rates, impact of different ownership strategies, combining incomes, negative gearing and net cash flow projections and internal rates of return of investment property;
  • Recommend appropriate finance structures to obtain maximum tax benefits and minimise liability risk;
  • Maintain income tax compliance and avoid common mistakes;
  • Connect clients with our network of valued and trusted investment property professionals;
  • Preparation of income tax returns and ITWV variations, maximising tax benefits and cash flows;
  • Maintain high levels of ethics and standard.
Looking forward at the investment property industry:
I believe the fact that accountants have neglected investment property, real estate agents and property marketing agents, in conjunction with property developers, have all but hi-jacked the investment property industry.
During the nineties property marketing agents started actively promoting negative gearing as a means to attaining wealth I had many battles with clients after being misinformed about what they could and couldn't claim in their tax returns. Although many of those clients enjoyed substantial growth in the value of their investment property, the experiences highlight the fact that some marketing agents in the early years operated with little regard for ethics and standards.
Although most investment property marketing agents operating today do so with much more professionalism, investors may be surprised to learn that they do so with little regulation, requiring little more than appropriate real estate licences.
Indeed, the investment property industry is now maturing with the establishemnt of professional associations, driven by highly regarded and professional people, raising ethics, standards and training in the industry, lobbying governments for regulations to protect investors.
How we help clients to build an investment property portfolio.

As accountants we are in a unique position to understand clients' financial positions and help clients reach their financial goals. For those clients who use investment property to achieve their financial goals we help in several ways:
  • Educating clients on taxation and the investment property industry
  • Structuring investment property projects to minimize income tax and CGT
  • Structuring investment property portfolios to ensure maximum deductability of finance
  • Identifying investment property costs and reviewing affordability
  • Calculating taxation benefits involved
  • Releasing tax dollars into clients’ investment portfolios to enhance cash flows
  • Protecting clients from common mistakes
  • Maintaining tax compliance for clients with investment property
Combined with professional memberships, continuing development in accounting and property, specialised tax and property analysis tools, networks with other investment property organisations and our experience, we offer clients an all-round tax and investment property service.
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By David Maynard
CEO My Tax Zone

Copyright 2014. My Tax Zone.