This is a popular strategy for those wanting to invest in property while minimising tax. Here’s how it works.
You buy an investment property with the view that your short-term costs (like interest payments and maintenance) will be less than the rental income you earn. These ongoing expenses may entitle you to a tax deduction - which reduces the amount you get taxed on.
Deductions may be used to reduce taxes payable on other income, like salary. The theory is that while this investment ‘costs you money’ in the short term, your property will hopefully continue to increase in value. This will provide you a capital gain in the long term.
Remember, this strategy relies on a strong capital gain for the short-term losses to be a worthwhile investment. You’ll also need to make sure your income and overall cash flow is at a level that will provide you with the money you need to fund the ongoing expenses shortfall.
There are often pretty significant transaction costs involved with buying and selling property (such as Stamp Duty, and real estate fees). You should speak to a registered tax agent to understand the tax implications of this strategy in your circumstances.