Australian property has proven itself to be one of the most reliable methods of wealth creation in recent history. Wealth creation with investment property has seen investors achieving returns of 43.1% from 2013 to 2017 (based on the eight capital cities combined average growth in that period).
There are several factors that explain why investment properties are excellent for building wealth compared to other investment options.
Investing in property is incentivized by legislative reductions to capital gains tax. In Australia, capital gains from investments are considered income and are subject to income tax. However, if the asset is held onto for one year or more the tax owed is reduced by 50%. This is so significant that the introduction of the capital gains concession in September 1999 by the Howard Government correlates with the property boom of 2000-2003.
Current legislation also allows property losses arising from negative gearing to be claimed against other types of income with few limits or restrictions. Since the rental income won’t fully cover your expenses, for accounting purposes it can be considered a ‘loss’. So come tax time, you can use this ‘loss’ to reduce your taxes while the investment property builds equity. This is especially beneficial for sophisticated investors who already have multiple revenue streams and high incomes as they will be able to claim more reductions.
To maximise how much you reduce your payable taxes, you can also claim depreciation on an investment property based on effective life. Since investment properties produce income, investors can claim investment property depreciation. The wear-and-tear that an investment property experiences over time will reduce its potential value compared to what it would have been under perfect condition, and you can claim the difference as property depreciation.
So in summary, an investment property achieves a high return on investment based on it’s equity growth, is subject to reduced capital gains tax, and you can claim any expenses or losses from it on your taxes. This is why wealth creation with investment property is a popular choice for sophisticated investors.