As a property investor, I see tax time as an opportunity to make sure I am maximising my deductions.
Property owners are able to claim a wide range of the expenses associated with owning a rental property to reduce taxable income and minimise their tax bill. *Please note that the below information is of a general nature and provided as a guide. I recommend that you speak with your accountant to see if this is suitable for your personal situation.*
Most investors would know about typical tax deductions, such as interest on loans, repairs and management fees, but there are lesser-known ways investors can reduce their taxable income this financial year. Here we go……
If interest or maintenance fees are prepaid, the cost can be deducted this financial year.
1. Pre-pay interest and expenses
For borrowers with fixed-rate loans, paying interest now for the next 12 months allows investors to claim the deduction this financial year. Expenses such as gardening or agents’ fees can also be prepaid, and service providers may even offer a discount. This strategy is particularly useful when an investor’s annual income is higher than normal, pushing them into the next tax bracket.
The pros are that you are accelerating your tax deduction. The cons are that you actually have got to have the cash, and that’s going to rule out most people. Secondly, it’s only a timing difference, so sooner or later things will even out.
2. Hire a quantity surveyor
Depreciation is one of the most valuable deductions property owners can claim. Investors can deduct the amount that assets used to produce income have declined in value over that financial year.
Estimating these declines is complex, so a quantity surveyor should be engaged to create a depreciation schedule. As a shrewd investor you don’t want to be leaving money in the table!
Fortunately, quantity surveyor’s fees are tax deductible, and depreciation schedules purchased before June 30 can be claimed this financial year.
3. Replace low-value items now
While depreciation for expensive items such as hot water systems is claimed over several years, a 100 per cent deduction is available for items costing under $300 such as small kitchen appliances etc.
Whenever you replace a plant and equipment item, you get to claim depreciation against the new one. For anything worth less than $300 that needs replacement, replace it in June rather than July.
4. Claim borrowing expenses
The costs to take out a loan, including establishment fees, mortgage stamp duty and mortgage broker fees can be also be claimed, although these deductions must be spread out over five years.
A lot of people forget to claim mortgage protection insurance that they might be taking out if they’re getting a larger mortgage.
5. Ensure claims are still valid
Recent changes mean some notable deductions are no longer allowed, which could come as a shock to some investors.
A landlord is no longer able to claim travel deductions for inspecting, maintaining and collecting rent. The fact that they’ve changed the travel rules indicates that the ATO and the government believe that travel claims were being abused.
Additionally, investors can no longer claim depreciation on second-hand items, or previously used items in property purchased or turned into an rental after May 9, 2017, as this deduction now only applies to new items.
6. Find a good accountant
Tax for rental properties can be especially complex, and a DIY approach may prove a false economy.
Most accountants should be able to give you the kind of advice you need to get your taxes right. But it is worthwhile checking that they do have experience with rental properties and how many clients they have in that space.
Ask them questions about your specific tax affairs and what advice they would be giving you.
7. Don’t lie!
The ATO is cracking down on dodgy deductions by property investors, and the punishment for rorting the system can far exceed any expected savings.
Owners of holiday houses in particular are in the ATO’s crosshairs, with a focus on people using their property for personal use and claiming deductions that are disproportionate to the income received.
The ATO is also on the lookout for properties that are truly available for rent or not.
For example they’re looking out for owners who charge artificially high rents or fail to adequately advertise a property as practices that are being targeted.
What property investors can claim as a tax deduction
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
Lender’s mortgage insurance billed to the borrower
What property investors can’t 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 the July 1, 2017 onwards
to inspect a property you own
for maintenance of a property
for rent collection
* *Please note that the below information is of a general nature and provided as a guide. I recommend that you speak with your accountant to see if this is suitable for your personal situation.*
If you need any further information or have questions about ANY aspect of your property investment, call me on 0412 427 877 or email claude@edisonproperty.com.au
Credits: Virtual Property Manager newsletter 21/6/18 and ATO