With only three weeks to go until the tax man comes knocking, if you own an investment property it’s time to get your paperwork in order. And if you don’t own an investment property, maybe some of these deductions will tempt you into the market.
What do I need to watch?
Investor, beware. Lie to the tax office and you will be caught. According to the Australian Taxation Office (ATO), 75% of first-time property investors thought to be cheating on their tax returns will be followed up. While innocent mistakes are common and may just require an amendment or a small fine, if you’re trying to cheat the system you probably won’t get away with it.
The biggest mistakes investors commonly make are to do with depreciation. Some expenses can be claimed immediately, while others need to be claimed over several years. Expenses such as capital improvements and repairs that are fully claimed in one year will ring alarm bells for the busy folks at the ATO, so make sure you write off substantial renovations and new assets according to the Tax Commissioner’s prescribed rates of self-assessed useful life.
Immediate expense claims include:
• Interest on a loan
• Repairs from new damage
• Maintenance of existing services and appliances
Expenses that must be claimed over several years include:
• Any damage that existed at purchase
• Renovations and improvements
• Replacement of any fixture or appliance
Expenses that can never be claimed include:
• Interest on a loan for property not genuinely for rent
• Travel expenses to the property when it is a personal trip
• Stamp duty on property transfer
Other traps to avoid
If you’ve borrowed against the equity in your investment property to fund a holiday or buy a new car, be warned – these purchases are not tax deductible.
According to Matthew Laming, associate director of accountancy firm PKF, even though the loan is an investment loan, private purchases cannot be claimed. "They need to say that's not deductible, and need to do a calculation to work it out,” he says.
In a similar vein, using a line of credit to buy a property and then drawing on it further to buy a car or holiday is also not a valid tax deduction.
What am I missing out on?
If you’re not one of the 1.6 million Australians who own a rental property, you’re missing out on some pretty favourable tax treatment. When the interest on the mortgage and other expenses are greater than the rent, the shortfall is used to reduce the investor's tax bill in a process that’s called negative gearing.
While rent may be the only source of income for the property, the list of deductions is long and includes interest costs, land tax, depreciation, property manager fees, council rates, maintenance costs and more. Come June, Resi Mortgage Corporation head of consumer advocacy Lisa Montgomery says investors are able to make minor repairs on their property and claim a tax deduction almost immediately.
Another advantage is the ability to pay interest on the home loan in advance. "In basic terms, this is when a borrower pre-pays the next financial year's interest and claims it as a tax deduction in the current year," says Montgomery. This means a boost to your return in the year you claim alongside the benefits of paying off your loan sooner.
While buying as a homeowner will get you into a property, buying as an investor gives you the benefits of capital growth alongside rising rental incomes. You also have the option of buying outside your home state, where property prices may be more affordable.
Angus Raine, CEO of Raine & Horne said, “It’s clear investors are taking the lead now, after the first home-buyer-generated boom of 2008 and 2009. The proof is in the pudding with the latest data from the ABS indicating that investor borrowing now accounts for more than one-third of mortgages."
According to the ABS, of the total borrowings of $21.7bn in April 2010, home loans to investors hit $7.99bn, an increase of 1.5% on the previous month.
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