Hey guys, the healthy investor here.
Today, I will show you how to get most, or even all of your tax back using real estate.
Take Tom, He has little work expenses and no real estate.
He earns $50,000 a year and pays $9,000 in tax, therefore taking home $41,000 gross.
Every year at tax time, he claims $500 from car expenses for random trips out of the office
and $100 for the cost of doing last years tax return by an accountant.
Tom will get little to nothing back from his tax return.
Unfortunately this is the case for most workers.
Now lets have a look at Jerry.
Jerry earns the same $50,000 a year, paying $9,000 in tax and takes home $41,000.
Jerry however invested in 2 apartments early on, rents them out for around $580 a week
and also contributes repayments out of his own income.
At tax time, Jerry claims the same $500 in car expenses, but also claims expenses on
both his properties in the form of the banks mortgage interest, borrowing expenses, Strata
payments, water and gas bills, council rates, repairs and maintenance, insurance, agent
management fees, capital works and depreciation.
That's quite a long list of deductions, most of which Jerry has had to fork out of his
rental income, but the last two deductions, Capital works and Depreciation, is where Jerry
gets most of the upper hand.
See those deductions are counted as legitimate expenses, but is not a cost that Jerry has
actually incurred as an expense during the year.
Rather it is built in as depreciation in the value of the building and its fittings itself.
But realistically as we all know, real estate does not depreciate in value over time, but
almost always does the opposite.
So Jerry can leverage this strategy to maximise the expense claim and get a big tax refund.
Lets calculate how much he can get back.
We have his regular income of $50,000 of which he already paid $9,000 in tax.
We also need to include the rental income he receives from both his properties of $30,000
each, of which he has paid no tax yet.
In terms of expenses to claim as deductions, Jerry has the same $500 car expense, and $100
cost of doing last year's tax return as Tom's expenses.
In addition, Jerry's investment expenditure also includes $16,000 in mortgage interest,
$4,000 in strata payments, $1,500 agent management fees which works out to be about 5% of the
rent, $900 in water and gas utility bills, $800 in council rates, $400 in landlord insurance,
$18,000 for combined capital works and depreciation in the first year using deminishing value
method, and lets allow $1000 in repairs and cleaning per year on average.
Since Jerry has two properties, lets multiply this total by 2 for simplicity, and add on
a $395 borrowing expense which actually covers both properties.
So even though Jerry's income has increased to $110,000, his expenses to claim as deductions
has also increased greatly to $86,195, giving him a total taxable income of $26,805 for
the year.
This means that his tax bill is only $2,000.
Since Jerry has already paid $9,000 in income tax, he will receive $7,000 in tax refunds
through the mail.
If Jerry had a third property, he would have received all of his $9,000 tax back.
But that would not be efficient as it only nets him the extra $2,000.
The most efficient income for the third property using our numbers in order to pay no tax would
be $57,000 per annum, fourth property at $69,600 per annum, and fifth property at $82,200 annum.
Whilst that number of properties is getting unattainable for average level of income,
it is still the primary method that the super wealthy use in order to reduce their tax bills,
and is more effective the higher your income.
This method is called negative gearing and should be among the plethora of financial
strategies in your repotoire.
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