Get the most out of your tax return each year by ensuring you are aware of these 10 tips and tricks.
Blogger: Peter Gianoli, general manager, Investor Assist
At the start of a new financial year, there are a number of considerations that property investors should be aware of – particularly first-time investors – if you want to be smart about tax and investment property. You may think you have all the deductions and exceptions covered, but even the most experienced investors can often make mistakes when it comes to tax and investment properties.
To make the process easier for you, I have outlined 10 quick tax tips for property investors. This list is certainly not exhaustive, but hopefully it’s a useful place to start to learn about tax and property investment.
Tax tip #1: Manage your capital gains and losses
The first tip for maximising tax deduction on investment property is to manage your capital gains and losses. If you have made a capital gain during the financial year you can minimise it by offsetting it against capital losses or trading losses incurred during the same year. It is also important to remember you can receive a 50 per cent discount on capital gains where an asset is held for longer than 12 months, so this is important when considering the timing of a sale. The relevant date for calculating capital gains is the contract date, not the settlement date. It is also worthwhile considering carrying forward any capital losses to future years if there are insufficient gains to absorb it in the same year. You can carry losses forward for an indefinite period, but you can’t carry losses back. So if you've made a capital gain, you may want to trigger a loss to offset it.
Tax tip #2: Bring forward your expenses if you are not renting your property in the next financial year
If your tenants have moved out or if you don’t intend to rent your property again in the next financial year, it is important to incur any planned expenses before the end of the current financial year. This means organising for the work to be done (even if you haven’t paid for it yet) because if you don’t incur the costs now you can’t claim them in the next financial year if you do not earn any rental income on the property.
Tax tip #3: Don’t forget to claim your travel
Tax and investment property claims are not just related to the property itself. In fact, all your costs incurred to inspect your investment property are tax deductible, including travel, so remember to apportion the appropriate component when looking at your investment property tax deductions.
Tax tip #4: Consider pre-paying your expenses
Act clever when thinking about tax and investment property. If you have a geared investment then you might want to consider pre-paying next year’s interest to gain an immediate tax deduction. You can also get a deduction by pre-paying next year’s insurance premiums or bringing forward expenditure what would otherwise be spent after 30 June.
Tax tip #5: Consider when you buy appliances and equipment
Generally appliances and equipment, such as ovens and hot water systems, depreciate over time; so if you buy an item in June, you will only be able to claim one month of depreciation, which is a fraction of what you have spent. If you have any big items which you know need to be replaced in the near future, consider the best time to do it early in the financial year.
Tax tip #6: Items under $300 can be written off immediately
Take this into consideration when purchasing an item around this value. Spending $340 on an item as opposed to $280 can affect your ability to immediately write it off. Investment property tax deductions of this nature are something easy to keep in mind.
Tax tip #7: The number of property owners affects the outcome
Surprisingly enough, the number of property owners and their percentage of ownership can have a serious impact around tax time and claiming of investment property tax deductions. For example, the $300 test applies to the individual owner’s share of the property. If a new item cost $580 and the property is owned equally between two people, then it will qualify for an immediate write-off as it’s under $300 per owner.
Tax tip #8: Initial repairs to an established property are not tax deductible
When it comes to tax and investment property, many investors aren't aware that initial repairs to an established investment property are not tax deductible. If the carpet needs replacing when you purchase an investment property, this would be an improvement. On the other hand if the carpet started to show evidence of wear and tear while tenanted, the replacement costs would be a deduction. It’s important not to be sneaky about it either, as it doesn't matter how long you wait. If the carpet needed replacing when you purchased the property you can’t claim it as a deduction if you wait a few years to replace it. All the initial repairs will do is increase your cost base (which is deducted from your eventual sale price to calculate your capital gain), which is another reason why it often pays to build a new property, rather than buy an older investment that is run down and in need of immediate repair.
Tax tip #9: Understand when a change is considered an improvement
A repair can become an improvement (which isn't tax deductible) if it doesn't repair the item back to its original state. For example, you may have cracked tiles on the roof but if you decided to replace the roof with a metal roof rather than replace the cracked tiles, the change will be considered an improvement and will not be deductible. However, there are always exceptions to the rule. For example, removing carpets and polishing the existing floorboards is a deductible repair even though it’s not returning the item back to its original condition. And tree removal is claimable if the tree is diseased or causing damage; however, it is not claimable if you think the tree is likely to cause damage in the future. Similarly, you cannot claim the tree removal if you decide you don’t like the maintenance associated with pruning the tree or raking up the leaves. If you are unsure what you are able to claim, it is better to consult your property manager or accountant to determine if you are entitled to claim the deduction before you incur any costs.
Tax tip #10: You can’t claim an immediate deduction if you replace something entirely
If you replace something in its entirety, rather than just replace the damaged or broken section, you can’t claim an immediate tax deduction on investment property. For example, if a panel of the fence is damaged and you replace the entire fence rather than just the panel, it is not deductible as a repair. The same applies if you have a broken cupboard door in the kitchen and you replace all the kitchen cupboards rather than simply fix the door. It is important to know that in these instances, none of the expenditure is deductible. Similarly, an item costing less than $1,000 will qualify for depreciation of 18.75 per cent in the first year, so if a hot water system is purchased for $1,600 and the property is owned equally by two people, it will qualify as less than $1,000 and depreciation of 18.75 per cent in the first year will apply.
Finally, I recommend all property investors find themselves an experienced accountant who understands tax and the investment property market, and can give you all the advice you need – not just at the beginning of the financial year, but right throughout the year.
Peter Gianoli joined ABN Group in 2011 to establish Investor Assist. Peter has more than 15 years of experience in the property industry working across some of the country’s premier development projects and throughout his career has overseen the sale and settlement of properties worth in excess of $1bn. Peter is also a highly sought after public speaker and has educated audiences throughout Australia and around the world on topics including property marketing and investment.