Smart property investors use all the legal tax rules to minimize their cash flow leakage and maximise their deductions.
The government encourages property investors to provide accommodation for those who need it by offering them a range of tax benefits.
While most investors know about the typical tax deductions, such as interest on loans, repairs and management fees, there are lesser-known ways investors can reduce their taxable income this financial year.
But be careful…the tax man is watching you, so make sure you stay within the rules.
1. Get a depreciation schedule
Property investors, like other business owners, can deduct the amount that assets used to produce income that has declined in value over that financial year.
This is called depreciation, but estimating the sum that can be claimed is complex, so it’s wise to instruct a quantity surveyor to prepare the most appropriate report for your property.
By the way…their fees are tax-deductible.
2. Pre-pay interest and expenses
If you have borrowings against your investment it is worth considering whether pre-paying next year’s bank interest (if fixed) or certain expenses to gain an immediate tax deduction in this financial year would be of benefit.
This strategy is particularly useful if your income is higher than normal this year.
3. Replace low-value items now
While depreciation for expensive items such as hot water systems is claimed over several years, it is possible to claim a 100 per cent deduction for items costing under $300 in the year the items are purchased.
4. Don’t forget to claim borrowing expenses
The costs to take out a loan for your investment property, including establishment fees, mortgage stamp duty and mortgage broker fees can also be claimed, although these deductions must be spread out over five years.
5. Keep your receipts
With the ATO examining property investors' claims more carefully than ever, you need to be diligent with your paperwork.
This starts with keeping all receipts as the ATO considers these verifications that you’ve spent the money.
At Metropole Property Management, we recommend allowing our team to pay for your property’s outgoings.
This way we keep track of all the paperwork and send you a statement with all your income and expenses for you to pass on to your accountant at the beginning of each financial year.
6. Find a good accountant
The taxation rules for property investors have become are complicated and sometimes downright confusing.
And recent changes mean some deductions are no longer allowed.
For example, the landlord cannot claim travel deductions for inspecting or maintaining or collecting rent for their property. And deductions no longer apply for items certain items that were previously depreciable.
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A DIY approach may prove a false economy so find a property-savvy accountant to prepare your tax returns.
Now, more than ever it’s important that you get good advice from your accountant on what you can and can’t claim, as well as on structuring your investment for maximum effect.
Fortunately, your accountant’s fees are tax-deductible.
7. Don’t cheat
The ATO is cracking down on dodgy deductions and the penalties can be up to double the tax plus interest.
They are looking carefully at maintenance and repair claims that are really improvements and can’t be written off straight away and false claims for holiday homes are Directly in the tax man’s crosshairs.
What are your obligations?
If you want to maximise your deductions, it’s important to know how to best manage your tax claim.
For the most up-to-date requirements regarding taxation and residential rental properties, you can refer to the Australian Taxation Office (ATO) website.
But in short, as an owner of an investment property owner, you must be able to demonstrate that you’ve made every effort to rent your property out.
Some of your considerations might include:
- Collecting and producing evidence that it’s been advertised for rent
- Make sure the property is in good enough condition to attract renters
- Setting a realistic rental price
- Removing unreasonable restrictions that may deter renters
What income must you declare?
You need to tell the Australian Taxation Office how much rent and rental-related income you received.
This could include:
- Rental bond returns e.g. if your tenant defaulted on rent or caused damage to your property
- Insurance payouts e.g. when you receive a payment to compensate for damage to your property
- Letting and booking fees you received
- Any amount a tenant pays you to cover the cost of repairs for which you then claimed a deduction (assuming, for example, the tenant has caused the damage themselves)
What property investors can’t claim as a tax deduction
There are some costs that you may consider tax-deductible, but which in fact are not. These may include:
- Acquisition and disposal costs - although these may be added to your cost base for calculating CGT when selling.
- Expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants
- Expenses that are not related to the rental of a property, such as:
- Expenses connected to your own use of a holiday home that you rent out for part of the year
- Costs of maintaining a non-income producing property used as collateral for the investment loan
- Expenses incurred in relocating assets between rental properties prior to renting
- Expenses relating to your personal use of the property
- Interest expenses on loans where the borrower is not on the property title
- Travel expenses
- to rental seminars about helping you find a rental property to invest in
- to inspect a property before you buy it
- Travel expenses from July 1st 2017 onwards
- to inspect a property you own
- for maintenance of a property
- for rent collection
Source: ATO
What property investors can claim as a tax deduction
The ATO will allow you to claim a wide range of expenses, subject to certain conditions and these may include:-
- Advertising for tenants
- Bank charges
- Body corporate fees and charges
- Cleaning
- Council rates
- Annual power guarantee fees for electricity and gas
- Gardening and lawn mowing
- In-house audio and video service charges
- Building, contents and public liability Insurance
- Interest on loans
- Land tax
- Preparation, registration and stamp duty expenses for lease documents
- Legal expenses (excluding acquisition costs and borrowing costs)
- Mortgage discharge expenses
- Pest control
- Property agent’s fees and commissions (including prior to the property being available to rent)
- Expenses incurred in attending property investment seminars to improve the performance of a current income-producing property
- Quantity surveyor’s fees
- Costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time
- Repairs and maintenance
- Cost of a defective building works report in connection to repairs and maintenance conducted
- Secretarial and bookkeeping fees
- Security patrol fees
- Servicing costs, for example, servicing a water heater
- Stationery and postage
- Telephone calls and rental
- Tax-related expenses
- Water charges
What property investors can claim over a number of years
- Amounts for decline in value of depreciating assets
- Capital works deductions
- Loan establishment fees
- Title search fees charged by your lender
- Costs for preparing and filing mortgage documents
- Mortgage broker fees
- Stamp duty charged on the mortgage
- Fees for a valuation required for loan approval
- The lender’s mortgage insurance billed to the borrower
Source: ATO
