As an investment property owner, you're responsible for reporting and paying taxes on your property. Here are some tips to help you understand your tax obligations and file your taxes correctly. First, be aware of the different types of taxes that may apply to your property.
Next, make sure you keep good records of all your income and expenses related to the property. Finally, consult a tax professional if you have any questions or need help filing your taxes. Taking these steps will help ensure that you're in compliance with tax laws and that you maximise the benefits of owning an investment property.
If you own an investment property, it's important to be aware of the tax implications. So here are some tips to help you minimise your tax bill. Firstly, make sure you keep good records of your expenses so that you can claim them on your tax return. Secondly, consider holding the property in a company name or trust.
This will reduce the amount of tax you pay on any rental income. Finally, think about claiming depreciation on the property - this can save you a lot of money in the long run. You can reduce your tax bill and keep more of your hard-earned money by following these tips!
Tax Advice for Those Who Own Investment Properties
The end of the fiscal year is the ideal time for owners and managers of investment properties to take stock of their holdings and ensure that they are in the best possible shape so that they can achieve the highest possible return on their investment. It is possible to maximise the amount of lawful tax deductions associated with an investment property by doing necessary repairs and maintaining the bathrooms, while at the same time ensuring that the property's value is maintained or even increased. Now that the elections are over, confidence and certainty are returning to the market for rental property. As a result, many investors are taking advantage of the discounts that are available to them by performing routine bathroom maintenance or repairing their buildings.
Disclose All Income From Investments And Rentals
Because of the effects of the epidemic, many of the more than 1.8 million people in Australia who own investment homes have seen a disruption in their income as a result of the tight rental limits that the government has placed.
According to Tim Loh, an associate commissioner at the ATO, this indicates that the revenue of owners of investment properties may have decreased because tenants negotiated cheaper rates or waived payments.
Loh encourages the declaration of income from all real estate sources, including rent from sharing a portion of the primary residence and vacation residences, as well as record keeping regarding the utilisation of lodging share platforms like Airbnb.
Avoid Mates’ Rates
Only during the time that the property is actually rented out or legitimately available for rent can investors make a claim for a tax reduction.
This indicates that the Tax Office will investigate claims of complete ownership for properties in which only a portion of the ownership is held. This includes landlords who charge what are known as mates' rates rather than market prices and who collect rent for only a portion of the year yet claim payment for the entire year.
Properties that are rented out to friends or family at a reduced fee should not be included in the search results.
This is considered to be a residential rental rather than a business one. The income will still be subject to taxation, but the amount of the deductions you can claim will be limited to an amount equal to the annual rent you have collected. In addition to this, you won't be able to incur any losses. If you were counting on the benefits of negative gearing, you will not want that to be the consequence.
Don't Take Deductions For Recently Bought Properties
According to the comparison website RateCity, the amount of money that is being lent by investors has skyrocketed. Since May, more than $9 billion in loans have been provided, which is the greatest amount since June 2015 and is more than twice as much as the value in May of last year when COVID-19 was just getting started.
On the other hand, investors are not permitted to claim deductions for recently acquired rental properties.
It is not possible to make an instant claim for the money spent on repairing damage and faults that were already present at the time of purchase, as well as the costs of remodelling.
These costs, on the other hand, are deducted over the course of a certain number of years or added to the cost base of the property for the purposes of computing the capital gains tax. Prepare yourself for the Australian Taxation Office (ATO) to check such claims and push back against assertions that do not make sense.
At the conclusion of the first year of ownership, owners are eligible to begin filing claims.
Avoid Using the Redraw Facilities on Investment Mortgages for Your Own Personal Benefit
The Australian Taxation Office (ATO) is going to monitor redraw facilities on investment mortgages that are being used for personal reasons, such as purchasing a vehicle. The ability to draw back additional payments that have been paid on a loan is enabled through a feature known as a redraw facility.
In addition, you shouldn't claim an excessive amount of interest expenditures. One example of this would be if the owners of the rental property tried to claim borrowing costs on both their primary residence and their investment property.
Avoid Distributing Rental Income Wrongly
It is important not to wrongly divide rental income and expenses among owners. One example of this would be claiming deductions for a property that is owned jointly by only the person who has the larger taxable income rather than claiming them jointly.
Avoid Making Claims About Rentals That Aren't Actually Available
According to the Australian Taxation Office (ATO), if you own a vacation house but do not rent it out, you are not required to include any information on that property in your tax return until such time as you sell it.
The Tax Office is keeping a watch on the following potential outcomes:
- Properties that are not advertised on a website that is frequently visited by a large number of people.
- Properties that are not maintained in a satisfactory manner.
- Homes that are advertised as being available for rent but have absurd requirements, such as "no children" or "no pets," attached to them.
- Properties that are unable to attract renters that are reasonable.
In order to verify claims, the ATO is equipped with advanced data-matching capabilities. The amount of data that the ATO currently receives from such a wide variety of sources, and not just government entities, is really staggering.
Don't Forget to File For The Home Office!
As a result of COVID-19, a record number of people are now working from home offices or makeshift workstations like as kitchen tables. According to Loh of the ATO, the number of persons claiming costs related to working from home increased by more than one-third to 4.42 million in the previous year.
There are three different approaches to calculate the costs of running a home office:
- The temporary shortcut method, available for the duration of the entire fiscal year, authorises a claim of 80 cents per hour across the board. It pays for expenses associated with working from home, such as a phone and internet connection, gas for heating and cooling, lighting, and office supplies. Those who are applying for the benefit do not require a designated work space but are required to use a diary or timesheet to keep track of the amount of hours they work from home.
- A fixed-rate of 52¢ an hour. This is for folks who have a space that is solely devoted to their business, such as a home office. Consumables for telecommunications, the internet, and computing devices are not included, nor is the depreciation of value associated with technological apparatus. You are only allowed to claim expenses for things that are directly relevant to your job. For instance, claims for internet usage should represent time spent working on the computer at work, not time spent streaming shows on Netflix.
- “Actual cost method”, which means making use of expenses to calculate a deduction on charges for a wide variety of things, ranging from cleaning to computers. This is a more involved process, and it demands the diligent maintenance of accurate expense records.
Don’t Forget Depreciation
The gradual deterioration of an asset or piece of property due to the passage of time is referred to as depreciation. After the interest paid on loans, it is the second-largest tax deduction that can be taken by owners of investment properties.
An investor who spends $750,000 on a property with four bedrooms should anticipate a deduction of more than $16,000 in the first year, with the total deductions over the course of five years coming in somewhere around $67,000.
A pre-owned apartment with two bedrooms and a price tag of $550,000 can still qualify for a first-year depreciation deduction of more than $6500 and a cumulative deduction of over $27,000 over the course of the following five years.
Take Extra Caution With The Records
Maintain precise and up-to-date records of both your income and your expenditures. The information must be retained for a period of five years without being altered in any way and unharmed. They are required to be either in English or to have an easily accessible translation. The Australian Taxation Office (ATO) suggests photographing receipts as a precaution against their being misplaced or damaged.
Achieving Perfection in the First Round of Repairs and Capital Improvements
The full cost of ongoing repairs that are directly related to wear and tear or other damage that resulted from your renting out the property can be deducted in the same tax year that the expense was incurred. For instance, it is possible to immediately deduct the cost of restoring a portion of a damaged roof or the hot water system.
Initial repairs for damage that existed when the property was purchased are not immediately deductible; however, a deduction may be claimed over a number of years as a capital works deduction. For example, replacing broken light fittings and repairing damaged floorboards are examples of initial repairs that are not immediately deductible. When you sell the property, these expenses are factored into the calculation of whether you made a profit or a loss on the sale of the property.
Renovating a bathroom or replacing an entire structure, such as a roof, even if only a portion of that structure is damaged, are examples of improvements that do not qualify for an instant tax deduction. Nevertheless, they are construction expenses, which you are eligible to deduct at a rate of 2.5% each year for a period of 40 years beginning on the day the building was finished.
Imagine that you have to entirely replace a broken object that can be removed from the house and the total cost of doing so is more than $300. (for example, replacing the entire hot water system). In that scenario, the expense needs to be written off gradually over a period of time.
Claims That May Be Made
Fees related to investment properties can be deducted in a number of different areas, including interest on loans, costs associated with property management, and maintenance expenses, which might include repairs to bathrooms.
The expenditure of regular maintenance, periodic repairs, and even unanticipated repairs are all considered to be valid business expenses that can be deducted by property owners. These costs include the following:
- Cleaning between tenancies
- Upkeep of the yard, cutting down of trees, and mowing of the grass
- Inspections for termites and other insects on a yearly basis
- Re-sealing and re-waterproofing damp areas like bathrooms and laundry rooms
- Regular touch-ups with paint.
Home improvements might also qualify as tax-deductible business expenses or as capital improvements that can be written off on an annual basis. These may include things like the following:
- Performing renovations on a kitchen
- Increasing the amount of land occupied by the property
- Performing renovations on a bathroom or private ensuite.
What Impact Will The Coronavirus Outbreak Have On Your Tax Returns And Claims?
The COVID-19 outbreak has had a substantial influence on the financial situations of many people in Australia, notably those who invest in property. The majority of landlords and tenants have been encouraged to create their own arrangements in terms of rental repayments. This comes despite the fact that state governments have placed a moratorium on evictions.
Even if you have made arrangements with your renters to delay or reduce rent, you will still be allowed to claim the expenses that you pay while maintaining your property as a rental income deduction.
After the emergency situation has been resolved, if you are fortunate enough to receive rent arrears payments, these funds, when received, will be subject to taxation. In the event that your bank delays loan repayments as a result of COVID-19, the expense is still considered to have been incurred by the landlord, and as a result, a deduction can still be claimed for the interest component of the loan.
What Is The Most Important Tax Information You Need To Know?
When filing their claims and tax returns, real estate investors absolutely need to have this organisation on their side.
It is essential to keep invoices, receipts, and bank statements for all property expenditures, in addition to proof that your property was available for rent, such as rental listings. The golden rule states that if you can't substantiate it, you can't claim it, so it is important to remember that if you can't claim it, you can't claim it.
Investors in real estate have a responsibility to make every effort to confirm that all records may be accessed and are in satisfactory condition. In addition to this, they should look for copies of missing invoices for them in order to maximise the amount of money they can receive refunded.
Because of the effects of COVID-19, you should also be informed that the typical appearance of both your income and your expenses may be significantly altered.
What Are Some Tax Deductions That Real Estate Investors Can Make?
When it comes time to file your taxes, the amount that you pay towards your mortgage will be the most significant deduction you can take advantage of. Keep in mind, however, that the only deductible portion is the interest.
In addition to the interest that is associated with the purchase of the property, you can also deduct the interest that is associated with loans that were taken out to: make repairs or carry out maintenance; carry out renovations; purchase depreciating assets such as furniture; make renovations; purchase land on which a property is to be developed; or make renovations or purchases related to upkeep.
The following is a complete list of expenses that you are eligible to claim:
- Including the fees that are passed on by renting agents, advertising for prospective renters
- Final cleaning at the end of a rental agreement (including removal of rubbish)
- Real estate and property management agents (including management fees)
- Taking care of the garden and the lawn (including felling or pruning trees)
- Costs linked with the collection of rent and the payment of property expenses, including those for the secretary and the book-keeper
- Charges levied by the bank on the account that is used to receive rent and make payments
- Taxes on the land and the council
- Insurance (building, contents or public liability) (building, contents or public liability)
- Verification of credit
- Pest control
- Costs incurred by the bank or the solicitor for the safekeeping of title documents
- Financial guidance in relation to the property's taxes
- Legal fees associated with evicting a renter for failing to pay their rent
- Employing a debt collector in order to collect rent that is past due
- Having replacement keys cut
- Performing maintenance on appliances and systems such as smoke detectors, air conditioners, hot water heaters, and garage door motors
- Fees associated with the water supply (to the extent that the tenant does not pay them)
- Surveyor of quantities
- Patrols of protection
- The monitoring and maintenance of the security system
What Are Some Claims Filing Tricks That Investors May Not Be Aware Of?
A tax professional can assist you in determining all of the deductions, credits, and exemptions that you are eligible to take on your tax return. However, there is a possibility that some investors are unaware that they are eligible to deduct pre-paid expenses.
You are eligible to make a claim for a deduction for the whole amount even if you make a payment this year for an expense that will be incurred in whole or in part in the next year. This is especially helpful when it comes to expenses that span both the calendar year and the tax year, such as insurance premiums and subscription fees.
If you utilised your home phone, computer, internet service, and cell phone in the course of managing your rental property, you are also eligible to deduct the costs associated with using these items.
If you are an investor in real estate, you may also choose to seek the assistance of a quantity surveyor for assistance with your depreciation claims.
Although depreciation is typically one of the biggest deductions, it can be challenging to calculate it accurately. As a result, many homeowners fail to take advantage of potential deductions because they file their returns incorrectly.
What Common Errors Do Investors Make When Trying to Deduct Investment Losses?
When submitting their tax returns and making claims for deductions, investors in real estate are more likely to make mistakes than other taxpayers. However, if you do not want to be subject to an audit by the ATO, you need to avoid committing the following mistakes:
- Attempting to claim an excessive amount of interest expenses, such as in cases when property owners have attempted to claim borrowing costs on both their primary residence and their rental property.
- Incorrectly dividing rental revenue and expenses among owners, such as when a deduction on a jointly held property is claimed by the person with the larger taxable income rather than jointly. This can also occur when rental income and expenses are incorrectly allocated.
- Attempting to claim deductions for investment properties even though they are not truly accessible on the rental market. Owners of rental properties should limit their claims to the time period during which the unit was rented or during which it was actually available for rent. Personal use is not eligible for reimbursement at any time. This is of utmost importance for vacation homes, as the ATO frequently discovers evidence that home-owners are claiming deductions for their vacation pad on the grounds that it is being rented out, when in reality, the only people using it are the owners, their family and friends, often at no rent at all. This highlights the need for home-owners to be careful when claiming deductions for their vacation pad.
- Putting in a claim for repairs on recently acquired rental properties The costs of repairing any damage or faults that were already present at the time of purchase, as well as the costs of any renovations, are not immediately claimable. Instead, you can deduct these costs over the course of a certain number of years, or you can add them to the cost basis of the property for purposes of capital gains tax. Prepare yourself for the Australian Taxation Office (ATO) to check such claims and push back against assertions that don't make sense.
- Incorrectly dealing with real estate holdings that are rented out to members of the same household for a reduced fee. This will be considered a residential rental rather than a business one. Even though the income will still be subject to taxation, you will only be permitted to deduct expenses that are equal to or less than the amount of rent you have collected. You won't be able to make a loss, which is not a good conclusion if you were counting on negative gearing to help you make up for losses.