As you may be aware tax time is just around the corner. This means that all property investors should start preparing their documents to take advantage of opportunities to maximise their deductions and therefore, reduce their tax payable.
Whether this is your first financial year as a property investor, or whether you are an experienced investor, there are a range of tax deductions associated with your investment property/properties that will minimise your tax bill.
Before we list 6 EOFY Tax Tips for Property Investors, here is a quick checklist for you to consider:
- Know what you can and cannot claim as tax deductions for your investment property and make a list of them, so you can be sure you don’t miss anything.
- Consider prepaying any property related expenses. This could include rates or insurance due in July (if they have already been issued in June), prepaying any interest on your loan or prepaying additional super contributions.
- Do you have a quantity surveyor report? This enables you to claim depreciation or deductions related to Division 43: building write-off. Click here to read more on the ATO website.
- Identify any small repairs that may be needed on the property over the next 6 months. Consider bringing them forward into June to maximise this year’s tax refund.
- Review your tax-deductible expenses relating to your current employment or business.
- Find a good Accountant that you can trust and has experience working with property investors and claiming relevant deductions.
In addition to the above, you should always maintain your integrity and be completely honest with all information regarding your tax return. Also, avoid loopholes or trying to claiming deductions that you’re not entitled to.
The ATO is more vigilant than ever at the moment with deductions and is cracking down on dishonest people with severe punishments. Owners of holiday houses are in the ATO’s spotlight, especially those who have been using their property for personal use and claiming deductions that are disproportionate to the income received.
With all that being said, here are our 6 EOFY Tax Tips For Property Investors:
1. What Property Investors Can Claim as Tax Deductions
According to Bradley Beer, CEO of BMT Tax Depreciation, up to 80 per cent of investors don’t calculate their deductions correctly. This means that many investors miss out on significant tax saving opportunities.
Ensure that you don’t fall under this bracket by familiarising yourself with what you can and cannot claim. Here is a list below:
- Advertising for tenants
- Bank charges
- Body corporate fees and charges
- 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
Claimable Deductions 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
- Lender’s mortgage insurance billed to the borrower
2. What Property Investors Cannot Claim as a Tax Deduction
- Acquisition and disposal costs (although these may be added to your cost base 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
- 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 1 2017 onwards
- to inspect a property you own
- for maintenance of a property
- for rent collection
3. Benefits of Prepaying Any Interest or Expenses
Did you know? If you have a fixed-rate loan you can actually pay the interest now for the next 12 months? This allows you to claim the interest paid as a tax deduction in this financial year. Additionally, expenses such as gardening or agents’ fees can also be prepaid and claimed as a deduction.
Prepaying expenses can be particularly useful for investors who have earned an annual income higher than normal and are therefore likely to fall under the next tax bracket. For example, they may have experienced a spike in taxable income this year due to a redundancy, distribution or capital gain.
Not all investors can cough up the additional money to prepay annual expenses, but for some, it could be a valuable strategy.
4. Claiming Depreciation
Depreciation is one of the most valuable deductions that you can claim as a property investor. Claiming depreciation means that you are able to deduct the amount that the asset has declined in value over that financial year. Total amounts for the decline in value of depreciating assets is typically claimed over a number of years.
Estimating these declines can be extremely complex. Therefore, we always recommend that our clients pay a quantity surveyor to create a proper and accurate depreciation schedule.
Fortunately, in most instances, quantity surveyor fees are also tax deductible. So, if you have purchased a depreciation schedule before June 30, you can claim it in this financial year’s tax return.
5. Make Small Repairs and Replace Low-value Items
While depreciation for expensive items (eg. hot water systems) is typically claimed over several years, you can actually claim a deduction for smaller items costing under $300, in the year that the item was purchased.
If you’ve been putting off some smaller repairs on your investment property, now is the time to get a quick quote. By actioning the repairs before June 30, you could wipe the cost off your taxable income.
So, if you have an investment property with say a leaky gutter, an ineffective stove burner, or a deteriorating carpet, it could be worth bringing the repairs forward to get an instant tax deduction this financial year.
6. Find an Experienced Accountant
Completing tax returns for investors with rental properties can be a complex task.
This is why choosing an accountant who is experienced is of paramount importance. Not only will they be up to date with the latest laws surrounding property, but they will also be able to give you better insight into what you can and can’t claim.
Doing it yourself or asking an accountant (who is not experienced in property) to do it for you, could end badly. At best, you may make mistakes or forget to include critical deductions that could lose you money. At worst, you could get fined by the ATO for making significant errors.
At Infinite Wealth, we can refer you to a great team of Chartered Accountants (CA’s). They can help you to take advantage of all relevant opportunities; maximising your deductions and reducing your total tax payable.
Due to being chartered, they are typically more expensive than your traditional accountant. So, if you are an investor with only one or two properties and currently have an accountant who does a good job with your tax, we encourage you to stay with them.
But as you start to grow your property portfolio, your tax returns will become more complex. This is when we suggest that it would be highly valuable to seek the services of one of our Chartered Accountants. If you would like us to connect you with one of our CA’s, contact us here.
If you are an existing Infinite Wealth client and have any further questions relating to your investments, Strategic Wealth Plan or tax, please reach out to your Client Manager right away. They will ensure that your enquiry is handled promptly.