With property remaining a high-priced asset, it’s more important than ever for investors to ensure their property investments are a financial success.
The latest data demonstrates the property’s popularity. One in five households (21%) owns a home in addition to their usual residence.
Maximising taxation benefits is one key element. However, the ATO recently found that 9 out of 10 returns were incorrect, so it’s essential to check your paperwork as we approach the end of the financial year.
Here, we outline considerations for you when looking to maximise your investment\’s financial success.
Get your structure right
As with any investment asset, ensuring the proper ownership structure for a property asset is vital because it can significantly affect your tax position each financial year.
It’s also sensible to check if you are using the right structure to help protect your investment from creditors, provide income in retirement, or cope with the unexpected death of a part-owner.
Managing the loan
Once you establish your investment loan, tax still remains a consideration. Any deductions you claim for your loan expenses must directly relate to earning assessable rental income.
If you use the redraw facility on your home’s mortgage to fund an investment property, you won\’t be able to claim the interest as a deduction if you subsequently use your family home as a rental. There are also capital gains tax (CGT) implications with this strategy.
Costs related to loan establishment fees cannot be claimed as a deduction upfront and must be spread over the term of the loan or a five-year period, whichever is shorter.
Rental deduction dangers
Although many investors focus on the tax deductions they can claim from a property asset, both rental income and deductions are key areas of ATO interest.
You also need to be careful not to overclaim. Many new investors make the mistake of claiming an immediate deduction for initial repairs after purchasing a property. Existing damage must be claimed over several years as a capital works deduction and is used when working out your capital gain or loss when selling.
Deductions such as advertising for tenants, professional property management, council rates, land tax and strata fees, building and landlord insurance, and pest control can only be claimed for time periods directly connected to earning income.
Depreciation or capital works?
Property investors can claim a wide range of deductions for expenses associated with maintaining and financing property assets, but care is needed.
Claims for depreciation of assets with a limited effective life (such as freestanding furniture, washing machines and TVs) can be made each year, but deductions for capital works must be spread over 40 years following construction. Capital works include improvements or alterations such as adding a driveway or altering the building.
Check your capital gains tax (CGT)
When it comes time to sell your investment, capital gains tax (CGT) is an important consideration. The key to making your investment tax-effective is to ensure you have identified all legitimate expenses contributing to the property’s cost base so you can correctly calculate the capital gain or loss.
The property’s cost base includes the price paid plus your buying and selling costs (such as stamp duty, legal fees and the agent’s commission). You are not permitted to include amounts already claimed as a deduction, including depreciation and capital works.
Any capital gain must be included in your tax return for the income year the property is sold, while capital losses can be carried forward and used in future years.
Next steps
Speak with your local Nexia Adviser today to ensure you maximise your investment assets and reach your true potential.
