9 tax tips for real estate investors

With the end of the financial year coming up soon, I thought I would provide some general tax strategies for property investors to consider:

1. Documentation

Keep summaries of all your rental income and expenses.

This is much easier if you have your property manager looking after your property where they pay all expenses and collect all income.

They will normally provide monthly and annual statements.

Ensure you have all bank statements showing interest expense.

The annual statement should show a summary of interest expenses.

A specialist property accountant can assist by ensuring all allowable tax deductions are made.

2. Depreciation

Only registered quantity surveyors are generally authorised to prepare depreciation schedules.

If you are contemplating a renovation a quantity surveyor can produce a scrapping schedule, which puts a value on all items to be thrown away.

This value is expensed in the year of expenditure. The new items are then depreciated with a new depreciation schedule.

3. Travel

In the past, all your costs to inspect your investment property were tax deductible, including travel.

A few years ago this was changed and travel expenses to inspect your property or collect rents are no longer allowable.

4. Interest expenses 

Only interest expenses on borrowed funds used to invest are deductible.

It is the purpose of the loan that determines deductibility, not the security used to obtain the loan.

A split loan should be considered when a loan is used for both investment and private purposes.

If capitalising interest the Tax Office may require evidence of correct documentation and intention.

Interest deductibility should be easy but if not properly documented and managed this expense can cause frustration if the ATO decides to review.

So the assistance of a specialty property accountant should be used.

5. Trusts

The use of a trust can be a major benefit to property investors by improving asset protection, estate planning and increasing flexibility

If using a trust ensure it has been correctly set up and operated to ensure you do not lose your interest deductibility, which is fully allowable by the ATO if you meet the requirements.

6. Pre-pay expenses

If you have a geared investment it is worth considering pre-paying next year's interest to gain an immediate tax deduction if you have a fixed-interest loan.

You can also get a deduction by pre-paying next year's income protection insurance premiums.

Also, consider bringing forward expenditures that would otherwise be spent after June 30.

If you are planning on doing repairs on your property, note:

Care should be taken in determining whether 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).

7. Manage capital gains

Capital gains generated during the year can be minimised by offsetting them against capital losses or trading losses incurred during the same year.

To reduce capital gain generated on the sale of property or other assets during the year consider selling any assets which have lost value and whose future is bleak.

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 relevant date for calculating capital gains is the contract date, not the settlement date.

8. Manage capital losses

Capital losses incurred in any year are available to be carried forward to future years if there are insufficient gains to absorb in the same year.

It can be carried forward for an indefinite period.

Capital losses cannot be offset against other income such as business trading income if you've made a capital gain this year, review your portfolio to see whether it is worth realising a capital loss to offset the gain.

You can't carry losses back.

So if you've made a capital gain, you may want to trigger a loss to offset it.

9. PAYG variation

Where you have negatively geared rental investments, the negative part offsets against your other income, e.g. salary, reducing your tax payable and resulting in a large refund when your tax return is lodged.

This refund can be used to reduce your loan, pay your interest expense or help finance another investment property.

To help with cash flow, would it not be great if you were able to access this refund throughout the year instead of waiting till the end of the year?

This can help finance that extra property, which can potentially pick up some capital growth between the beginning and end of the year.

This can be done by lodging an application to vary the income tax withholding using a form from ATO.

This can be done electronically online or you can download the form, prepare and lodge it manually.

PAYG instalment obligations should be reviewed and consideration given to varying the instalment for the June 2012 quarter, where the estimate of income tax payable for the year is less than the instalments raised by the ATO.

This will reduce the impact of this instalment on your cash flow.

Disclaimer
This article is general information only and is intended as educational material. Metropole Wealth Advisory nor it's associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice and taking into account your circumstances and objectives. 

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles