End of financial year is fast upon us, so we’ve compiled some tips and advice to help you make the most out of your tax return.
If you are one of the 1.7 million Australian property investors preparing to lodge their annual tax return, then tax time should be a pretty exciting time of year for you.
After all, it’s at this time of year that you can work out what income and deductions you can declare. If you’ve work things out correctly, you can leverage your investment strategy to generate a tidy financial profit – in the form of a tax refund!
“There can be numerous tax and other benefits associated with owning an investment property. The trick is to know what they are and how to make the most of them over the short and long term,” says Mortgage Choice spokesperson, Kristy Sheppard.
“If you haven’t already, now is an ideal time to assess your financial position, re-examine suitable investment strategies and explore ways to better use these to benefit your tax situation and property goals.”
Mortgage Choice suggests that property investors review the following aspects of their strategy, to ensure they’ve got their money working as hard for them as possible.
Assess your strategy
Negative gearing occurs when the combination of your home loan interest repayments and other related deductible expenses, such as council rates and repairs, is higher than the rental return. “The loss is offset against an investor’s gross income, meaning they are taxed on the reduced amount,” explains Sheppard.
“Positive gearing – where rental income exceeds the deductible expenses and loan interest – is preferred by others,” she adds.
The right strategy for you will depend on several factors, not least of which is your investing budget. If you’re unsure which strategy is right for you, don’t be afraid to ask for help. “Consult a professional tax adviser and mortgage broker before choosing a loan and buying property, to learn about the tax deductions available on your potential investment and what home loans suit your plans,” Sheppard advises.
Know what you can claim
As an investor you may be able to claim tax deductions for your rental properties on expenses such as:
- travel to collect rent or inspect the property
- advertising to attract a tenant
- real estate agent and/or property management fees
- body corporate/strata fees
- council rates
- pest control
- building insurance
- repairs and maintenance
- water charges
- home loan fees and loan interest
Pay mortgage interest-in-advance
Interest-in-advance loans are similar to standard fixed-rate, interest-only loans, but they allow you to pre-pay the next year's interest before 30 June, and claim it as a tax deduction in the current year. “This means that upon lodging a tax return, eligible investors can effectively receive a portion of their interest back via a tax refund,” Sheppard says. “Keep in mind that individual circumstances differ, so it’s always clever to seek expert advice from your tax accountant and a mortgage broker.”
Be mindful of capital gains tax
If you’ve sold an investment property you will be required to pay capital gains tax on any profit made above the original purchase price. “Keep in mind capital losses – meaning, no profit is gained upon selling the asset – are not deductible against your ordinary taxable income, but they are used to reduce any other capital gains you make from assets during the financial year or any gains in subsequent years,” Sheppard adds.
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