6 Tax Tips for Property Investors

Tax time only comes once a year, just like Christmas and your birthday!  To ensure you get the best tax return don’t leave your paperwork until the last minute.  Staying on top of your administration and filing throughout the year will make tax time stress free for both you and your Accountant.

 

We have put together a few tips to help maximise your return when it comes to tax time.

1 - Keep all your documents

You will need to have proof of both rental income received and expenses incurred from owning your rental property.  Expenses incurred include the management fee charged by your real estate agent to manage your property, any maintenance or repairs carried out during the financial year, but not renovations.  

 

Renovations, such as extensions are a capital expense and are used to work out capital gains tax when you sell the investment property.  Make sure you check with your Accountant as they can advise if the work falls under an expense category or is a capital item.  In any case they will still need the invoice for a capital expense as the cost can generally be depreciated at the very least.

2 - Setting a realistic rent

During COVID we know some Landlords have either had vacant properties or have had to reduce the rent significantly.  Whilst you may think your investment property is worth ‘top dollar’ it is up to the rental market to put a true value on your property.  

 

If you hold out for a higher rent then you will not receive any income which means all those expenses you incurred, like interest on the loan to purchase the property, may go begging if you don’t have any other income to offset these expenses against.  And don’t forget that receiving 20% less per week than you think your property is worth, is more valuable than receiving no income at all.

3 - Mates Rates

It is generally easier to keep friends and business separate.  If you rent your property to a mate or a family member at a much lower rent than the market rate, you may find yourself with a ‘please explain’ from the ATO.  This could result in hefty penalties, unexpected tax charges and being placed on the ATO’s watch list, which is somewhere you don’t want to be. 

Expenses incurred will also only be deductible proportionate to the percentage of market rent charged when rented to a family member at below market rates.

4 - Using the property as a Holiday Home

Having an investment property that you can also use as a holiday home sounds ideal.  You get the best of both worlds – rental income when it is rented out and the ability to use it yourself or let family members or mates stay there rent free.  If you own an investment property outside of an SMSF*, then you can do this, BUT remember that you can only claim expenses for the times that the property was rented out at market rent.  The ATO will need to see proof of income and the associated deductions for when it is rented.  

*There are much stricter rules around an investment property owned by your Self-Managed Super Fund. If you want information on this, please contact us.  One of the main rules is that under no circumstances can you use the property yourself or let someone rent it below market rent.

5 - Claiming Interest on your loan

One of the benefits of having an investment property is that the interest charged on the loan that you used to purchase the property can be claimed as a deduction.  Again, you can only claim the interest in periods when the property was leased and generating a rental income.  If you used it yourself for all the school holidays and Christmas holidays, then you cannot claim any interest or other expenses incurred for those periods.

6 - Making the most of deductions

A good reason for using an experienced Accountant is because they can make sure you claim all the deductions allowed.  These are the most common deductions:

  • Real estate management fees
  • Property advertising fees
  • Landlord insurance
  • Council rates
  • Water rates
  • Bookkeeping fees
  • Cleaning at the end of a tenancy
  • Taxation advice relating to the property
  • Gardening fees
  • Repairs 
  • Maintenance
  • Building depreciation
  • Asset depreciation

One final word on investment property – get advice from your Accountant.  They have the tax knowledge and experience to ensure you claim all allowable deductions and don’t claim for those periods that you were using it personally.  They have the experience to help you whilst you own the property and then help you work out capital gains tax and ways to minimise it when you sell the property. 

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