23 May 2014
Well, the tell-tale signs that we are near the end of the financial year are upon us! Advertisements for EOFY sales are everywhere we look, search parties for those mislaid receipts, and the usual tax time property jargon such as “depreciation” and “negative gearing” being bandied around the water cooler.
Real estate at tax time has its own language and terminology which can be very confusing, particularly if you’re new to the investment process. Element Finance Fremantle has put together a guide to the key phrases used at this time of year when we are thinking about your property investments, and what that means for your tax!
Capital Gains Tax (CGT)
A capital gain, or capital loss, is the difference between what it cost you to acquire an asset and what you received when you disposed of it. Selling assets such as real estate is the most common way you make a capital gain or capital loss. In other words, you make a capital gain when you sell a house for more than you paid for it.
You pay tax on your capital gains. So, when you make money from the sale of a property, it forms part of your income tax and is not considered a separate tax.
Most real estate is subject to CGT. This includes vacant land, business premises, rental properties, holiday houses and hobby farms. Your ‘main residence’ (family home) is generally exempt from CGT unless you rented it out for a time or it’s on more than two hectares of land.
If you are a property owner, capital gains tax may become an issue when you make a profit from selling your property. But there are a couple of standard exemptions which could assist. For more information, we can help you with a referral to an accountant, or visit the Australian Tax Office website.
The term ‘negatively geared’ sometimes causes confusion, especially among people new to the intricacies of property investing. Negative gearing occurs when the costs of owning a property – interest on the loan, bank charges, maintenance, repairs and capital depreciation – exceed the income it produces. Simply, at the end of the day, the investment property in question will run at a loss and you need to make up that shortfall from your own pocket.
Negative gearing can be used as an investment strategy in order to reduce your taxable income, maximising available tax benefits. If the property becomes cash flow positive (see below), this profit is added to your taxable income and you may have to pay more tax depending on the structure of your investments.
Like the name suggests, depreciation is the decrease in value of an item over time. An example of a depreciating asset is your car, which is said to reduce in value a great deal from the time you drive it out of the dealership.
When it comes to investment properties, depreciation can certainly work in your favour. If your investment property depreciates, you can claim against the decreased value of your investment. Negative gearing and depreciation allowances are popular ways to reduce your tax liability. There are various rules around this in all States, so please speak to a professional, or we can get you in touch with the experts!
Cash flow positive
The reverse of negative gearing, your investment property is considered to be cashflow positive if your income generated from the property is greater than your outgoings – after you’ve taken into account tax deductions. Tax deductions include things like interest paid on your loan, depreciation, maintenance and service costs.
Equity is the difference between what your residence or investment property is worth and how much you owe on it.
Put simply, if your property is worth $300,000 and you still owe $100,000, you have $200,000 in equity. Over time, as you reduce the amount you owe on your home or the value of your home grows, your equity increases. Equity is a very good thing to have as it can be used to leverage further property purchases without your having to save a new deposit.
Of course there are lots more real estate and legal terms you will come across at tax time and when investing in property. We recommend you seek professional advice. Contact us to learn more on 6323 2350 or email@example.com
15 Apr 2014
When taking out a home or investment loan, there are many insurance products that are relevant and all have a different purpose. Choosing the right cover or combination of insurance products can be very confusing. This article describes the insurance products that you may need to know about if you’re considering taking out a mortgage.
Lender’s Mortgage Insurance (LMI)
Lender’s Mortgage Insurance (LMI) is in place to protect your lender if you default on your mortgage repayments. It is usual for your lender to charge you a fee for LMI if they are lending you 80% or more of the purchase price of your property. It is a one off payment made to your lender when you set up your loan.
It should be noted that LMI does not cover you if you should have a problem repaying your loan. In the unfortunate event that you cannot make your repayments and your home is repossessed and sold, LMI covers the gap between what the property is sold for and what is still owing to your lender.
With LMI, the fee is added to the total of your loan and paid off as part of your monthly mortgage repayments. Even though LMI may help you secure a lo-doc loan or a loan with a small deposit, you will still have to meet all the statutory credit checks to ensure you can meet your mortgage repayments when you apply for your loan.
Mortgage Protection Insurance
Home buyers often confuse Mortgage Protection Insurance with LMI but it is a completely different product.
Mortgage Protection Insurance is taken out by you to protect your home in the event that you are unable to meet your mortgage repayments due to sickness, injury, unemployment or death. (LMI is designed to protect the lender.) It should be noted that Mortgage Protection Insurance only provides cover for your mortgage and if you require coverage for other expenses in case of sickness, injury, unemployment or death you should consider the other forms of insurance listed below.
Like most personal insurance products, Mortgage Protection Insurance requires you to pay a premium either annually or monthly. The size of your Mortgage Protection Insurance premium will depend on the size of your home loan and how much of it you need to cover. Cover will vary depending on the provider, so be sure to read the PDS carefully so you understand what you are covered for.
Total and permanent disability insurance (TPD) & Life insurance
Total and permanent disability insurance cover is designed to give you a financial safety net if a permanent serious injury or illness makes it impossible for you to continue to work (depending on the the definition of the policy). It usually covers the costs of rehabilitation, debt repayments and the future costs of living, but this varies according to the provider. Life insurance usually only pays an agreed lump sum in the event of your death.
TPD insurance can often be taken out as part of Life insurance cover. You may have this cover with your superannuation, or you can organise it as a separate insurance product if you don’t. Remember that Life insurance only covers you if you die, so TPD insurance should be considered as a separate issue.
Income protection insurance
Income protection insurance is usually only designed to cover you if you are temporarily unable to work. It can usually be arranged so that it covers you for up to 75% of your normal income, until such time as you’re able to return to work or for the prescribed benefit period on your policy. It can be arranged so it covers you for illness and redundancy, depending on the policy and provider.
Income protection insurance is a good idea if you don’t have money saved to act as a safety net in the event you’re out of work. It could be used to cover the costs of day to day living and your mortgage.
If you purchase an investment property and want to rent it out, Landlord’s insurance can cover you for accidental or malicious damage to your property and any contents that you may have leased to your tenants for their use. It’s a great way to get peace of mind when you’re placing your most valuable asset in the hands of tenants!
Individual policies for Landlord’s insurance can vary greatly from provider to provider – in some cases it may be considered an add-on to building insurance or home insurance, so be careful to choose the product that’s right for your needs and particular circumstances.
Building insurance/home and content insurance
Building insurance is a product that you can take out if you are constructing or renovating a home, or if you wish to insure the building separately to the contents of your home. Home and contents insurance usually covers both the home and the contents.
This type of insurance product usually covers you for disasters like fire, flood, and damage caused to your home, garage and sheds due to accidents. It is designed to provide you with adequate cover in the event you need to repair or rebuild your home after an insurable event has occurred.
Policies for all these insurance products and what they cover vary a great deal from insurer to insurer. You should always read the product disclosure statement carefully before you take out any insurance product or policy, and ask questions of the provider to make sure you get the cover you need.
The various insurance cover you need will depend on your personal financial situation and the eventualities you need to cover. For more information or a referral, please get in touch today.
08 Apr 2014
Find out why more Aussies are ahead on mortgage repayments and how you can be too http://yhoo.it/1gC1bum
01 Apr 2014
Now is a perfect time to compare your home loan with what is available in the market. Phone our Fremantle office on 96323 2350 and our team will let you know how much you could be saving.
Watch out! Element Finance Fremantle have expanded their offerings to more than just home loans and investment loans. We are now able to help with EXTREMELY competitive Chattel Mortgages, Commercial HPs, Finance Leases and Novated Leases, Motor Vehicle & Car Loans and more.
If you or your business plan to purchase a car, truck or trailer, earth-moving or construction equipment, manufacturing or farming plant & equipment call Element Finance first.