It’s that time of the year again when investors can save thousands of dollars by being savvy with deductible items on their property. From insurances to renovations, there are various items investors are eligible to claim, however many of these items can be easily missed by those without the right knowledge or an informed accountant. It’s also worth remembering that to claim a deduction, you must be able to show how much was spent, how you worked out its value, and the way the expense was calculated. Here are some common ways to minimize your tax bill.
With every property purchase there are numerous staple items which are deductible regardless of the type of property. These include council rates, water rates, strata, and pest control. Insurances are also deductible including landlord’s, building, contents and public liability insurance. If you work with a property manager or real estate agent, these costs are also deductible including fees, commissions, letting fees, as well as statement and admin fees.
Further to property staples, are the ongoing repairs and maintenance costs, which are likely to vary year on year depending on the work required, and age of the property. These include plumbing, electrical, handyman costs, or any supplier who aims to repair the functionality to your property. Travel can also be deductible for the owner to carry out or inspect the property, or where the sole purpose for the trip relates to the property, for instance collecting rents.
Many investors should also look at claiming interest on their mortgage or loan, as it can often be the largest tax deduction within a negatively geared arrangement. If the property is available for rent, the interest incurred on the loan is tax-deductible including the funds used to purchase the property or for repairs and maintenance.
Big ticket versus smaller items
Throughout the life of your property ownership, there is likely to be assets added to the property which are deductible via depreciation. A depreciating asset is a stand-alone functional item which is not usually affixed to the building that decreases in value over time – carpet, curtains and dishwashers for example. These kinds of depreciating assets may not necessarily be deductible upfront, but depreciation can take effect over the life of the asset and therefore claimed for a number of years. The exception to this rule is for an asset valued under $300 in which case the cost of the item is immediately deductible.
Solar panels are also a great way to receive a government rebate but will need to be included in your assessable income. Although it is important with any purchases where a government rebate is involved that you seek advice from your accountant prior to submitting your tax return.
The below is a good illustration of the difference between deductions over a five- year period for larger and smaller deductible items.
With many investment purchases, the idea is to minimize your spending in order to maximize your return. However, many investors choose to invest more capital into their properties to benefit from tax incentives available to them, or lower their overall taxable income. Renovations are a key way for landlords to increase the value of the property and claim deductions simultaneously.
When renovating an investment property, it’s important to choose your timing wisely. If they are undertaken too soon after purchase they can be deemed as having no real value to the ATO. It’s also wise to spend money on items that have a higher rate of depreciation such as white goods, window
coverings, and water tanks. Speaking with a financial professional is advised before undergoing major renovations to ensure the property will provide the returns required to avoid over or under capitalizing in the area.
Depreciation of the building
Many investors don’t realize that their investment may also attract a deprecation tax benefit through a building allowance. The allowance refers to the construction costs of the building and includes items such as concrete and brickwork which can be offset against your assessable income. This applies for half of the purchase price of any buildings built after 15 September 1987 at a rate of 2.5% per annum. So, let’s say you purchased a property valued at $500,000, that equates to a $6,250 depreciation each year.
It is best to engage a quantity surveyor to assess your investment. They are specialists in measuring construction costs and will provide you with reliable figures for your property tax depreciation schedule, enabling you to maximize your tax position.
Although tax-reduction strategies are important, the end of financial year is also an opportune time to evaluate your current financial position and set yourself up for the best possible year ahead. To discuss investment options available to you, contact me on 02 9522 3000 today