Property is an investment that can provide substantial taxation savings to an investor in the form of both a deduction for real costs and a deduction for on paper costs or costs that are not actually incurred, such as depreciation. A newer property will provide a greater level of depreciation than an older established property. The higher levels of depreciation mean that newer properties may provide more opportunity for tax savings. Other tax-deductible costs include ongoing maintenance, management fees and interest paid on loans against the property.
Moreover, the growth in market value of the property can also be viewed as a way to reduce tax because tax is not levied against the growth in value of the property until such time as the property title is transferred. This is known as capital gains tax (CGT).
Do remember though that tax benefits are not a reason on their own for a client to choose property as a suitable vehicle. For all costs except “on paper” costs (such as depreciation), the client with a taxable income of more than $37,000 still must incur a cost of $1 to save 32.5 cents of their tax (or up to 45 cents for higher income earners). The yield and growth of such a property would need to exceed this net cost to the client and the opportunity cost of not investing this money elsewhere.