Author: Greville Pabst, CEO

The recent digression in residential real estate conditions has not deterred buyers, reveals Westpac’s report on consumer sentiment, in June.

Resurgence in buyer confidence in real estate is a positive sign for the Melbourne market, following evidence of a decline in the city’s clearance rates in May.

According to figures, while owner occupier housing commitments fell slightly in April investor activity increased by 2.0%. This trend supports reports that many investors are diversifying their investment portfolios to include residential real estate in light of recent share market volatility, a loss of confidence in REITs and substantial changes to financial planning regulations.

Despite recent increases in interest rates residential property remains a strong investment solution that is relatively risk averse, with the added benefit of tax concessions, which can make the long term costs of owning investment property negligible.

As a steady increase of investors venture back into the market and the financial year draws to a close it is an opportune time to consider the positives of owning an investment property.

Thanks to significant tax benefits aimed at encouraging residential real estate investment the cost of owning an investment property can be relatively minimal and can be an effective way of reducing taxable income leaving investors with a valuable asset, which if purchased wisely, will appreciate.

Negative gearing is a common strategy used by many property investors, which relies on the capital growth of a real estate asset. In simple terms, a negatively geared investment property is one where the costs of owning the asset, including mortgage repayments and all outgoings, are higher than the rental return. Investors can then offset a significant amount of this ‘loss’ against their total taxable income effectively reducing the amount of tax payable. This can be very beneficial to high income earners who are subject to higher taxation thresholds.

Negative gearing is particularly effective during times of higher interest rates as it allows for greater deductions, including the interest paid on the investment loan. Additionally, owners of investment property may also claim deductions for council rates and government taxes such as stamp duty, insurance, agent, legal and valuation fees, as well as maintenance.

Applying deprecation to the asset is another way to reduce the cost of owning an investment property. Depreciation of an asset is an allowance for the gradual degradation of an asset or building, which can be claimed as a tax deduction over time. It can be applied to fixtures and fittings such as carpets, hot water units and some installed appliances and to capital works and renovations to the building itself.

But although these strategies make owning investment property a more tangible prospect would-be investors must note that the return from these tax benefits will only come after the conclusion of a financial year, prior to which time they must meet all costs associated with the investment.

This article was published in the Saturday Herald Sun 26th June 2010.