When looking to invest in a property or having invested in a property, you will want to know what costs or taxes need to be deducted from your property’s income before you can take home your profit.
Firstly, let’s discuss the profit which can be broken into two areas depending on the type of investment you have made. Profit from a buy-to-let property will be referred to as property income whilst profit from flipping a property can be referred to as gains.
Defining property income
Simply put, property income is any profit that comes from property investment activity, for this purpose it will be rental income. When calculating profit from rental income, it is important to remember to make all the necessary deductions. This includes tax, landlords insurance and other insurance you may have on the property, as well as any maintenance or repair costs that were incurred during the financial period (year or quarter).
Rental income is sometimes subject to tax relief such as rent-a-room relief or replacement of domestic items, so it is important you claim any tax relief available to you to maximise your profits. A further benefit of rental income is that it is rarely subject to National Insurance Contribution further adding to the amount of profit you can make.
Gains from Flipping a property
If you have chosen to invest in a property, renovate it then sell it on, you may be subject to Capital Gains Tax. This is a tax applied when a property is sold for an increased value. Depending on the increase in property value, the amount of Capital Gains Tax that needs to be paid can be high. It is important to include all taxes, especially Capital Gains tax in all financial predictions and forecasts as well as final calculations.
You can make great returns on your investment when investing in property, however it is important to ensure all expenses, taxes and costs are factored into calculations when working out your net profit.
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