Positive cash flow properties can generate passive income for investors. But do you have to pay tax on the income from positive cash flow properties or can it be tax free?
Do you pay tax on positive cash flow property? Positive cash flow properties are properties that generate income above all the expenses you pay. So you should be generating passive income and a profit every single year.
However you may hear that you don’t actually pay tax on positive cash flow property or that you can even get a tax refund.
Today I want to answer the question, “Do you pay tax on positive cash flow property?” The short answer is that it depends on your property and it depends on your situation as well.
What happens generally is that income from your property is added to your taxable income. If you have a structure set up like a trust structure or you are investing using a company then this may be different. But generally speaking if you are investing in your own name then income from that property is going to be added to your taxable income.
I just want to put a disclaimer out there that I am not a tax accountant and this should not be seen as tax advice. Whenever you are doing anything tax related always see a professional and get their help with your situation.
Usually the income from the property or the profit from the property gets added to your taxable income. So for low income earners, even if you are generating an on-paper profit you might not be paying tax on that because it depends on how much money you earn and whether you are pushing up into that range where you are actually paying tax on the money that you earn.
But let’s assume that you are an average person that’s earning a decent income and you are already in that tax bracket where you’re paying tax that’s around 30% or 40% when you are earning over $180,000 per year.
First I want to explain that profit from a property is your income minus your expenses. That’s pretty simple.
However, in property you have something that’s called the “phantom expense” which is depreciation. This is the lowering in the value of your property itself such as the building and all the items within the property like your fixtures, fittings, the skirting and the carpet.
What happens every year is that these things go down in value and you can depreciate them. Every year the carpet gets more and more worn and becomes less and less valuable. You can claim that lowering in value as a phantom expense or depreciation.
This phantom expense or depreciation is what makes answering this question a little bit more difficult. So what I want to say is that on-paper profit adds to your taxable income.
Therefore if you have income from the property and all the expenses that you pay (like your mortgage, your council rates, your insurance and the expense of depreciation which is that on paper expense) and you still generate a profit after your expenses and depreciation then generally that profit is added to your taxable income. Based on those circumstances you would need to pay tax.
If however you make an on-paper loss then that could lead to a potential tax refund so let me just explain this in a little bit more detail.
A positive cash flow property by its very nature makes a profit that is passive income that you could put in your pocket and do whatever you want with it. However because you have the opportunity to claim depreciation on the lowering in value of items, that depreciation could be more than the passive income you are getting from the property.
So when you do your income minus expenses you might have a profit but then when you take away the on-paper loss of depreciation that profit might turn into a loss. It is therefore possible for you to make money from positive cash flow property but an on-paper have a loss for the year.
This means that in a lot of circumstances (again speak to a tax accountant as this is not taxation advice) that on paper loss would actually be deducted from your taxable income and therefore you may be eligible for a potential tax refund.
You also can’t forget about capital gains tax. Even though you might not pay tax on the positive cash flow property because you got depreciation or you are a low income earner when it comes time to sell your property, if that property has gone up in value then you may be eligible for capital gains tax on that property. So that’s something that you need to consider.
I hope that answers your question of: “Do you pay tax on positive cash flow property?” The answer is it depends on your situation but generally speaking an on-paper profit has to get added to your taxable income and an on-paper loss can often be removed from your taxable income leading to a potential tax refund.
If you want to learn how to find positive cash flow properties then check out my free eCourse by going to www.onproperty.com.au/free. I will show you how to find positive cash flow properties and how to research the area as well so that you can be sure that the property you invest in is unlikely to go down in value. Then you can get the positive cash flow and hopefully get the capital gains as well.
So until tomorrow remember to stay positive!