A crafty property investor can adopt a range of strategies to minimise their tax and maximise their tax benefits.
As an investor, you should fully understand what you can claim as immediate deductions, deductions relating to depreciating assets and capital works deductions. It’s also important to remember to add these to your property’s cost base to reduce the amount of Capital Gains Tax (CGT).
Deductions checklist for property investors
Here is a list of deductions that you should keep track to maximise your tax breaks:
- Interest on your investment loan
- Land tax
- Council taxes
- Water charges
- Repairs and maintenance (inc. gardening, pest control, travel etc.)
- Agent fees (commission is only applicable to CGT, not deductions)
- Administrative cost of leases
- Bank charges
Investors need to notice and record the immediate expenses that are deductible such as land tax, interest on property loans, repairs and maintenance and insurance. For depreciating assets such as appliances and capital works deductions such as renovations and remodelling, claim annual deductions. Those who fail to claim all of their deductions could end up paying too much unnecessary tax. It could also be worthwhile to ensure that you add all eligible capital expenses to your property’s CGT cost base to reduce the CGT payable. You can also accelerate deductions by prepaying eligible expenses and then performing last minute repairs to your properties.
- Capital works. These are eligible large scale repairs that your local Council carries out on your property.
- Cost base. The cost of the asset (in this context, the property) when you bought it but it also includes certain other costs like acquiring, holding and disposing of the asset.
- Deductions. This is an amount that is or may be deducted from a taxable income, or tax that is due to be paid.
Tips for reducing CGT
- Ensure that you try to maximise the cost base of your property legitimately. Common expenses that are looked over are external cost base amounts and random costs on the purchase or sale of the property.
- CGT is payable when a ‘CGT event’ occurs which when you sell an asset, or when the contract is signed. Where possible, a deferral of the contract date may defer the CGT costs, which means tax saved.
Confused? Get expert help from a tax specialist
Some matters relating to property tax are best dealt with using the help of an expert. By filling in the form below you can speak to an expert from the Property Tax Specialists to learn more about tax in relation to your property.
Repairs vs improvements - what's the difference?
From a taxation point of view, repairs and maintenance are deductible whereas improvements are considered capital expenditure, which means you will need to deduct them on a yearly basis. The Australian Tax Office (ATO) defines repairs as the ‘replacement of renewal of a broken part’ and improvements are ‘landscaping, insulating and adding a room’.
- It’s easier for investors to look over depreciation deductions in existing buildings, instead of new ones - this includes the depreciation of the building itself.
- Using professional services, such as a quantity surveyor means that you’ll get an accurate depreciation schedule.
- When doing renovations, make sure you keep track of a schedule to put a value on everything you’ve thrown away.
- Depreciating assets that cost $300 or less are generally immediately deductible.
Negative Gearing and taxes
There are some hidden benefits of buying a property when using negative gearing.
Your losses can be claimed back against your income, as the Australian system sees property investment like a business. With negative gearing, it’s possible to get a second stream of income, as the tax refunds can add to your rental income - it then becomes more about the cash flow, rather than the gearing. When the tax benefits are used to offset your losses, the end result can actually exceed the expenses incurred, which means a positive cash flow.
To determine whether an investment property suits your strategy, look at the after-tax weekly cash flow rather than before negative gearing has an impact. As property prices increase, so will rent, so your return on investment also increases. Also, when interest rates decrease, it is likely that your loan costs will too, giving your more returns.
Pay as you go
This method of tax collection allows investors to make deductions regularly, rather than in one lump sum at the end of the financial year. However, an accountant is essential as they usually submit financial information to the ATO. For property investors, tax liability will depend on things like interest, maintenance, rates and depreciation of the rental property. Be mindful that it doesn’t replace a normal tax return, so you will still need to file one at the end of the financial year.
Some investors don’t try to reduce their PAYG instalments, to show their expected negatively geared deductions, in the case they may spend the money. But experts urge investors not to do this.
Hefty penalties apply if you’re caught cheating
Property investors shouldn’t be stupid and cheat with their taxes, this includes claiming that others have done renovations, when you have done them yourself. The ATO is constantly auditing the deductions claimed by property investors and hefty penalties apply to those who are claiming ineligible expenses, or failing to declare income.
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