What are the tax implications?
Getting the right loan structure is critical to ensure you make the most of your assets.
Do your sums carefully. High loan repayments can mean little returns or even a loss for a few years. This works for some investors because negative gearing brings some tax relief and the short term losses are offset by the long term gains.
Whether your investment property is negatively geared, or getting a positive rental income, you can claim expenses from the property while it's rented.
Whilst you pay tax on any rental profit you make, you are eligible to claim tax deductions related to the expenses you incur whilst owning and maintaining any investment properties. By claiming the available tax deductions, you can reduce your rental profit and ultimately reduce your taxable income.
Some expenses can be claimed immediately and some are claimed over a number of years.
When you have work done to your property, take note of whether the work is a repair or an improvement. Repair costs are deductible in the year they occur, but the cost of improvements (capital costs) become part of the cost base, which is used to work out your capital gain or capital loss when you sell the property.
Some examples of expenses you can claim for your investment property are listed below:
- Bank fees for your loan account
- Interest paid on your loan
- Your real estate agent management and commission fees
- Council rates
- Body corporate fees
- Land tax
- Borrowing expenses such as loan establishment fees, title search fees, costs for preparing and filing mortgage documents, stamp duty charges, valuation fees and mortgage insurance
- Home and contents insurance
- If you supply or pay for electricity, gas, Internet service fees or Foxtel you can claim these charges
- Any professional cleaning, pest control and landscaping maintenance costs
- Capital works or construction costs
- Advertising charges to secure tenants
- Legal fees incurred during the sale or purchase of an investment property or costs associated with evicting a non-paying tenant and terminating a lease
- The decline in the value of the property
Capital Gains Tax
You may make a capital gain or capital loss when you sell your investment property. You pay capital gains tax on your capital gains. If the property is new residential property, you may also be liable for GST on the sale.
Capital Gains Tax (CGT) is a tax on the profit you've made on your investment property. It's based on the difference between your sale price and what it cost you overall (the purchase price plus anything you've spent on improvements or renovations). The Australian Tax Office describes any transaction related to CGT (like selling property) as an 'event'.
Depreciation and Investment properties
Depreciation is one of the most important (yet often overlooked) tax saving benefits available to investment property owners. Just like you claim wear and tear on a car purchased for income producing purposes, you can also claim the depreciation of your investment property against your taxable income.
There are two types of depreciation allowances:
Plant and equipment
such as carpets, blinds and whitegoods; and
items such as windows, brickwork and doors.
Plant and equipment items have varying rates of depreciation while capital works items are claimed at 2.5 per cent per annum.
- Your property doesn't have to be new 99 per cent of properties will attract some depreciation allowances.
- Depreciation is the only deduction that can be subjective. All other expenses - such as interest, strata fees, etc. must equal precisely the amount you have paid out.
- You can claim deductions on renovations, but get a professional assessment from a quantity surveyor before you renovate so you can claim full entitlements.
- Depreciating your investment property can dramatically improve your bottom line.
- If you have not been maximising or claiming your entitlements you can backdate your tax return.
Property depreciation is a non-cash tax deduction available to the owners of income producing properties. As a building gets older, items wear out – they depreciate. The ATO allows property owners to claim this depreciation as a tax deduction. Depreciation on items such as carpets, stoves, blinds, hot water systems, light shades and heaters are all valid deductions. There is also a deduction available for the wear and tear on the structural element of a building, commonly called building write-off.
Older properties & new properties
Investors often wonder about the depreciation potential of older properties compared to new properties. The simple answer is that new properties will get higher depreciation deductions, however all investment properties both new and old can attract depreciation deductions.
New properties have new fixtures and fittings, so the starting value of those items is higher, resulting in higher depreciation deductions. The same applies to the building write-off allowance. 2.5% of the structural costs of a building can be claimed per year for forty years. Construction costs generally increase over time, making building write-off deductions on new buildings higher.
Owners of older properties can claim the residual value of the building up to forty years from construction. For example, if an investment property is five years old, the owner will have thirty five years left of building write-off to claim. Building write-off is governed by the date that construction began. If a residential building commenced construction before the 18th of July 1985 there is no building write-off available. Investors who own properties that are built before this date will still be able to make a claim on the fixtures and fittings within the property and include any recent renovations, even if the renovation was carried out by a previous owner.
It is always worth getting advice about the depreciation potential of a property regardless of age. The deductions are not as high on older properties but there are usually enough deductions to make the process worthwhile.
Here are five depreciation tips to assist investment property owners.
No property is too old
An investment property does not have to be new. Both new and old properties will attract some depreciation deductions. One common myth is older properties will attract no claim. It is worth making an enquiry about any property.
Deductions are available for 40 years
From the date construction was completed the Australian Taxation Office (ATO) has determined that any building eligible to claim the building write-off allowance has a maximum effective life of 40 years. Therefore, investors can generally claim up to 40 years depreciation on a brand new building, whereas the balance of the 40 year period from the construction completion date is claimable on an older property.
Claim renovations completed by the previous owner
Anything in the property that occurred in a previous renovation will be estimated by our Quantity Surveyors and deductions calculated accordingly. This includes items that are not obvious, for example new plumbing, water proofing, electrical wiring or a pergola, etc. For capital improvements to be eligible for the Division 43 building write-off allowance, construction must have commenced within the qualifying dates.
There are two main areas to a property depreciation report, the plant and equipment and the building write off allowance
Plant and equipment items are items which can be 'easily' removed from the property as opposed to items that are permanently fixed to the structure of the building. Items which are mechanically or electronically operated are considered plant items, even though they can be fixed to the structure of the building. Plant and equipment items include but are not limited to: hot water systems, rangehoods, carpets, garage door motors, blinds, door closers, ovens, freestanding furniture, cooktops and air-conditioning systems. The building write-off allowance (also known as Division 43) is based on the historical costs of the building and includes materials such as bricks, mortar, walls, flooring and wiring.
Use a qualified professional
Quantity Surveyors are qualified under the tax legislation TR97/25 to estimate construction costs for depreciation purposes and are one of a few select professionals who specialise in providing depreciation reports. They are affiliated with industry regulating bodies and gain access to the latest information and resources through their accreditations. BMT Tax Depreciation is accredited with the Australian Institute of Quantity Surveyors (AIQS), The Royal Institute of Chartered Surveyors (RICS) and The Auctioneers & Valuers Association of Australia(AVAA).
Record Keeping for property investors
When you invest and lease property it's important to keep records from the beginning. Hopefully you'll have carefully filed away receipts and proof of any expenses throughout the year relating to your property so you can claim everything you're entitled to. A simple folder to collect receipts and records can make tax time so much easier.
Declare your income
You will be required to declare the full amount of rent you earned in your tax return. If you have a managing real estate agent an annual summary should be provided to you. There may also be other rental-related income you need to consider so discuss any other associated payments you have received with your accountant. If you are leasing out residential accommodation, you are not liable for GST on the rent you charge.