August 29, 2019
Learn how to reduce your next tax bill
Tips to reduce tax on your investment property
When deciding to purchase a property for investment purposes, you should always consider selecting a place on the basis of the returns generated and how well the investment will help your individual goals.
Every person’s needs can vary greatly as will your tax strategy. It is best that you seek advice from a professional tax advisor who is familiar with your personal circumstances and is up to date with the latest tax laws.
Zelda from Zibis and Co. explains how property investors can tap into some very useful tax benefits. These include the ability to claim a tax deduction for many of the costs of owning a rental property; the tax savings of negative gearing; and the availability of capital gains tax discounts.
Let’s take a closer look at how each of these tax benefits can work for investors.
As a Landlord you can normally claim a tax deduction for a wide range of the expenses related to your rental property including interest on a loan. It should be noted that these expenses can usually only be claimed if the property is tenanted or available for rent.
Your tax adviser can give you a clear picture of what you can claim for your personal circumstances. Though in general, the following expenses can normally be claimed on tax:
- Advertising for tenants
- Agent’s property management fees and commission
- Loan interest and ongoing loan fees
- Electricity and gas – annual power guarantee fees
- Water charges
- In house audio and video service charges
- Council rates, land tax and strata fees
- Building depreciation plus depreciation of fittings and fixtures like ovens, carpets and hot water heaters.
- Repairs, maintenance, pest control
- Gardening/ landscaping
- Building, contents and landlord insurance
- Stationary, phone costs and any travel to inspect the property
- Accounting or book-keeping fees.
- Quantity surveyor’s fees
- some legal fees
- Travel expenses you incur relating to your residential rental property.
From 1 July 2019, when you make a payment to a contractor for services connected with your rental property, you should check that they have an ABN. If they don’t provide you with an ABN, you may have to withhold 47% from that payment and pay it to the Australian Taxation Office (ATO).
Negative gearing refers to the situation where the costs of owning your rental property exceed the rental income. The difference, which represents a loss, can normally be offset against your income like salary and wages.
So, say your income is $80,000 a year but your property costs you $15,000 a year, you’ll only need to pay income tax on $65,000.
This way you’ll pay less tax, but don’t be mistaken, it is still a loss that hopefully will be more than made up for by an increase in the property’s value over time. The main advantage of negative gearing is that it makes a rental property much more affordable as the tax savings can be substantial.
Investment properties don’t have to be negative geared. If the rent outweighs the costs of owning the property, it is said to be ‘positive geared’ and you can expect to pay tax on the profit the property generates each year.
Capital Gains Tax
The time may come when you choose to sell your investment property, and if you make a profit on the sale you are said to have made a ‘capital gain’. This gain is taxable – the profit is added to your regular income in the year you make the sale, and the tax will be determined accordingly. However, there are important capital gains tax concessions available to property investors.
Firstly, the cost base used to calculate the capital gain includes the price you paid for the property plus buying and selling costs like stamp duty, legal fees and agent’s selling commission. This helps to reduce the profit for tax purposes.
If you have held onto the property for over 12 months you are entitled to claim a 50% discount on the CGT. Put simply, if you made a profit of $200,000 on the sale of the property but you have owned it for a year, you will only pay tax on a profit of $100,000. This represents a significant saving of tax for investors and it offers a good incentive to own the property for the long term.
Secondly, if the property is owned by a company or a complying super fund, you may be eligible for CGT discounts. An alternative is considering setting up a trust.
Depreciation is how much the tax office says assets decrease in value as they age. Property Investors can claim depreciation in two ways:
Capital works depreciation
This is the cost of building the investment property. The depreciation is spread over 40 years which is the length of time the ATO says a building lasts before it needs replacing. For instance, on a new building that cost $300,000 to build, you could make a $10,000 tax claim each year for 40 years.
Depreciating assets are those that have a limited effective life span and can reasonably be expected to decline in value over time. Such items include, ovens, cooktops, carpets, light fittings, heating and cooling units.
As an investor, you can either claim the prime cost method or the diminishing value method. The prime cost method gives you an equal tax deduction each year over the items effective life, which the diminishing value method gives you higher claims in the first years of the items effective life and smaller claims later on. Most investors will opt for the diminishing value as it will give you a higher depreciation rate earlier. However, your accountant will be able to advise which method is best for you.
From 1st July 2017, there are new rules for deductions for decline in value of certain second- hand depreciating assets in your residential rental property. If you use these assets to produce rental income from your residential rental property, you cannot claim a deduction for their decline in value unless you are using the property in carrying on a business or you are an excluded entity. For more information, speak to your accountant.
So how do you claim depreciation? It’s a good idea that you engage in a quantity surveyor. Quantity surveyors are experts at assessing the value of construction work. They’ll be able to provide you with a report on the rate of depreciation claimable on your property, and when you can claim it. You can then send the report to your accountant, who in turn will claim it on your tax return.
Are your assets protected?
When buying a property you should also have strategies in place to protect your assets from personal debts and liability. Limited liability companies and trusts can be a great vehicle to protect your assets however there are many other strategies that can be discussed with your advisor to develop the most beneficial structure.
Whether you are an existing investor, or you are looking at purchasing your first investment property, these are some of the helpful tips that will assist in maximizing your long term investment success. By seeking advice from the experts, you can keep up to date with the latest tax legislations and assist you to save on your next tax bill.
Written by Heather Christodoulou for Kurv Property Group Pty Ltd, August 2019