Investment property tax tips from a registered tax accountant
Jim owns an investment property. He’s made a list of deductions and thinks it should be straightforward to claim the deductions this year.
But he realises he’s not up-to-date on new rules (or upcoming changes to rules) about deductions for investment properties. He has an accountant and has checked out a few tax sites but he’s still Googling for any tax information that could give him maximum deductions.
Jim would like advice on any tax deductions he can claim that he hasn’t thought of.
What else does he need to know?
She shared 5 great tips on what to claim – and how to claim – for your investment property. And a bonus tip that will help you better manage your cashflow during the year.
5 Investment property tax tips to get maximum deductions
Investment property tax tip 1: Claim travel expenses
The cost of travelling can be claimed as a tax deduction:
- to inspect a property
- do maintenance
- to undertake repairs
- to collect rent
Note: 2016/17 is the last year you can claim travel expenses for residential property investments. From July 1st, 2017, all travel deductions relating to inspecting, maintaining, or collecting rent for a rental property will be disallowed.
Investment property tax tip 2: Apportion expenses
If your rental property is only available for rent:
- part of the year
- when only part of the property is available to rent
- the property is rented at non-commercial rates
You must apportion your expenses to determine the deductible amounts.
Investment property tax tip 3: Claim loan interest
Investors can claim the interest on the loan used to:
- purchase a rental property or depreciating asset for the rental property
- make renovations or repairs to the property
- purchase land to build a rental property.
Pre-paying interest (up to 12 months in advance) brings forward deductions to the current income year.
Investment property tax tip 4: Prepay expenses
Consider prepaying expenses to maximise the current financial year’s deductions. These may include repairs, rates, and levies.
Keep in mind initial repairs to an established property are not deductible.
Investment property tax tip 5: Claim depreciation
Rental property investors have access to a range of tax strategies. An often underused yet effective tax strategy is claiming depreciation as a tax deduction.
Property expenses, such as depreciation and capital works expenditure, can be deducted over a number years, adding to a significant return for property investors come tax time.
In this tip, you’ll find out:
- How to maximise your depreciation tax deductions
- About depreciating assets (including examples)
- In what situation you’re entitled to an immediate depreciation deduction
- New depreciation rules
- About capital works deductions (including the rate used to calculate this deduction)
1. How to maximise your depreciation tax deductions
Ask a qualified quantity surveyor to:
- inspect your property
- prepare a depreciation schedule (tax deductible cost)
A quantity surveyor will focus on two main elements in a depreciation schedule:
- Depreciating assets
- Capital works deductions
2. About depreciating assets
You can claim a deduction for certain items you’ve bought for your rental property when you bought the property or after you bought the property. These items are called ‘depreciating assets’. You can claim a deduction for the drop in the value of these items over time.
What is a depreciating asset?
The ATO considers a depreciating asset as an asset that:
- has a limited effective life; and
- can reasonably be expected to decline in value over the time it is used.
Examples of depreciating assets:
- Freestanding furniture
- Washing machines
- Television sets
3. When you’re entitled to an immediate deduction
For assets costing $300 or less, you can claim an immediate deduction for the entire cost of the asset.
This deduction cannot be claimed if the asset is one of a set of assets that together cost more than $300.
Depreciating assets valued at less than $1,000 can be grouped in a low-value asset pool and depreciated together.
4. New depreciation rules
From 1 July 2017, the government has changed what you can claim for plant and equipment depreciation deductions:
a. You can only claim plant and equipment depreciation deductions if you bought the items yourself.
b. If you buy plant and equipment for your residential property investment after 9 May 2017, you can claim a deduction over the effective life of the asset.
c. You can’t claim deductions for plant and equipment bought by the previous owner of your property.
5. Capital works deductions
Capital works deductions are income tax deductions that can be claimed for expenses such as:
- Building construction costs – for example, adding a room, garage, patio or pergola
- The cost of altering a building – i.e., removing or adding an internal wall
- The cost of capital improvements to the surrounding property
These deductions are usually spread over a period of 40 years.
A deduction may also be available for structural improvements, such as sealed driveways and retaining walls, if work began after 26 February 1992.
What rate is used to calculate capital works deductions?
Depending on the date the capital works began, the deduction rate is 2.5 per cent or 4 per cent (adjusted for part-year claims).
Capital works deductions can only be claimed for the period the rental property is rented – or is available for rent. Deductions cannot be higher than the costs of construction.
Bonus tip: better manage your cashflow during the year with PAYG variation
A PAYG variation allows investors to vary income tax withholding to access their end-of-year tax refund throughout the year rather than as a lump sum.
This can help you better meet your cash flow demands during the year, when you need it most.
Getting maximum deductions on your investment property
So now you know how to get the most deductions on your investment property while keeping the tax man happy. You’ve also learnt how to work out these deductions:
- Claim travel expenses (only for the 2016/17 financial year)
- Claim loan interest
- Apportion expenses
- Plan to prepay expenses
- Use a qualified quantity surveyor to prepare a depreciation schedule that focuses on depreciating assets and capital works.
To better manage your cashflow, you can vary your income tax withholding so you can get your refund throughout the year, rather than in one lump sum.
If you have any questions about any of these tips, or would like help to maximise your tax deductions, feel free to hit Reply.
Yours in property,