Tax tips for property investors
With the end of financial year fast approaching, we thought we would provide some general tax tips for property investors to consider:
1. Record keeping:
In order for you make tax time less stressful and to ensure that you claim all your entitlements you need to ensure you keep the right records.
This is much easier if you have appointed a good property manager to look after your property where they pay all expenses and collect all income. They will normally provide a monthly and annual statement, but as a general rule you need to keep the following records:
When purchasing a property:
- Contract of purchase
- Conveyancing documents
- Loan documents
- Costs to buy the property (such as legal fees, stamp duty on the transfer, buyers agent fees and initial repairs). You can’t claim an immediate tax deduction for these but they will reduce the tax you pay when you sell the property.
- Borrowing expenses
- Title Deed
During the time you are renting out the property:
You need to ensure that you include all your rental income in your tax return.
You are able to claim immediate tax deductions for things such as:
- loan interest
- rates and taxes, including council and water rates and land tax
- property management fees
- insurance
- body corporate fees
- cleaning and gardening
- repairs and maintenance relating to when your tenants were living in the property.
You can claim tax deductions over several years for things such as:
- capital works, otherwise known as building costs
- borrowing costs
When lodging your tax return make sure you:
- only claim deductions for periods that your property is rented out or genuinely available for rent
- don’t claim deductions for periods that you use the property yourself.
If you are managing your own property, it may be useful to utilise accounting software such as MYOB which allows you to upload receipts. Everything is simpler to find and account for when it’s stored in one place.
Ensure you have all bank statements showing interest expense. The annual statement should show a summary of interest expense.
*We recommend you seek a specialist property accountant to assist you by ensuring all allowable tax deductions are made.
Selling a property
If you sell an investment property or your main residence that you have rented out, remember:
- you may have to pay capital gains tax, even if you transfer the property into someone else’s name
- capital gains tax is the difference between your cost base (costs of ownership) and your capital proceeds (what you receive when you sell the property or the market value when you transfer the property)
- if you have claimed a capital works deduction in any income year your cost base should not include these amounts
- if you own the property for more than 12 months, you will be entitled to a 50% discount on tax on the capital gain
More information can be found on the Australian Taxation Office website.
It’s vital to keep track of all your property related expenses so you can claim all your entitlements at tax time.
2. Depreciation*:
Under Australian law, anyone who purchases a property for income-producing purposes is entitled to depreciate the building and the items within it against their assessable income.
Capital Works
The rate of deduction for these expenses is generally 2.5% per year for 40 years following construction.
Capital Allowances
For each of the assets where you may claim a deduction for decline in value, you can choose to use either the effective life the Commissioner has determined for such assets, or your own reasonable estimate of its effective life. Where you estimate an asset’s effective life, you must keep records to show how you worked it out.
Initial repairs
Costs you incur to remedy defects, damage or deterioration that existed at the time you acquired the property are considered to be capital in nature. These may be classified as capital works or capital allowances, dependant on what the expenditure was for.
Depreciating assets
Depreciable assets are those items that can be described as plant, which do not form part of the premises. These items are usually separately identifiable, not likely to be permanent, and expected to be replaced within a relatively short period and not part of the structure.
Examples of assets that deductions for decline in value can be applied to include: flooring, carpets, curtains/blinds, or included appliances like a washing machine or fridge,
Capital works
Capital works is used to describe certain kinds of construction expenditure used to produce income.
Examples of capital works include:
- building construction costs
- the cost of altering a building
- major renovations to a room
- adding a fence
- building extensions such as garages or patios
- adding structural improvements like a driveway or retaining wall.
Improvements
An improvement is considered anything that makes an aspect of the property better, more valuable or more desirable, or changes the character of the item on which works are being carried out.
Improvements include work that provides something new, generally furthers the income-producing ability or expected life of the property, goes beyond just restoring the efficient functioning of the property.
Improvements can be either capital works where it is a structural improvement or capital allowances where the item is a depreciable asset.
It is important to correctly categorise each expense you incur to ensure it is treated correctly for tax purposes.
* Only registered quantity surveyors are generally authorised to prepare depreciation schedules. Please seek advice from a professional that has been tailored to your property.
Talk to a registered quantity surveyor for personalised advice on what you can claim for your depreciation on your investment property.
3. Consider pre-paying expenses:
If you have a geared investment it is worth considering pre-paying expenditure that would otherwise be spent after June 30. If you are planning on doing repairs on your property you need to seek advice in determining whether a maintenance or repair is deductible or if it is considered a renovation or of a capital nature. Consider pre-paying other expenses such as rates, levies or possibly even interest (in the right circumstances).
4. Manage capital gains:
If you are planning to sell your investment property, timing can greatly influence the amount of tax you pay. Capital gains generated by your investment property can be minimised by offsetting them against other capital losses or trading losses which have occurred during the same year. To reduce the capital gain generated on sale of property or other assets during the year consider selling any assets which have lost value or where the future is pessimistic .
The 50% discount on capital gains is available where an asset is held for longer than 12 months. As this is a considerable saving consider the timing of any sale.
The information on this website is for general information only. It should not be taken as constituting professional advice from Homesearch Solutions.
Homesearch Solutions is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.
Homesearch Solutions is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.
