Property investors and tax are a match made in heaven. Sure, you may be feeling those first date nerves. “Can I get a deduction on the dishwasher? What about the oven? Should I wear these shoes?!” The answer is Yes, Yes and No.
Think of this as a back to basics, no holds barred, simple *gulp* run down of what you can do to get the tax system on your side.
Maybe it is just its name, but negative gearing gets a negative wrap. Without getting bogged down in the debate about this system (check out our article on the myths of negative gearing) it is worth considering as an investor.
A quick summary of what it is. If your rental income is smaller than the expenses for your investment property then you have a loss. You can use this loss to offset the tax for other sources of income, such as your salary. That is negative gearing. Done. It is in essence a way to manage your cash flow and this leads to:
PAYG Withholding Variation
That might be the world’s most underwhelming heading. It’s the opposite of clickbait. But where there’s negative gearing, there is this little guy. Say you can’t wait twelve months for your tax refund. You can apply to have your tax-withholding rate calculated based on your estimated taxable income. If you negatively gear your investment, this means your taxable income includes a loss.
Eg. A weekly income of $1200 – $200 loss from your rental property = taxable income of $1000. This leaves you $200 tax-free income each week.
What can you claim?
Here is the most important thing to remember. Ready? Keep Your Receipts. There are fantastic apps available that file and manage your receipts so there is no excuse. If you start making claims on items you don’t have receipts for, you open yourself up to trouble.
Within a year of purchasing the following, you can often deduct:
- Travel expenses to inspect property.
- Insurance (building and contents).
- Gardening and cleaning costs (these generate an income).
- Utility rates (if you are paying them, not the tenant).
- Council rates.
- Real estate fees (including advertising for tenants).
- Land tax.
- Pest control.
- Body corporate/strata fees.
- Interest on the investment loan. Be careful if you have the one mortgage financing your home and your investment. You need to set it up so you can show what part relates to the investment. You can only deduct the interest for funds used to invest, not for your home.
Over a number of years you can usually deduct:
- Mortgage set-up costs. (Usually over five years)
- Depreciation of the building and its contents (remember that dishwasher?) Look at getting a depreciation schedule made by a quantity surveyor to help you stay on top of what rate different items depreciate.
- Building costs (usually claimed at 2.5% per year). This applies to rental buildings purchased after 15 September 1987. With the help of a quantity surveyor, you can claim the portion of expenses left unclaimed when you bought the property. If it is a new building, the builder can often provide you with the cost details.
Despite popular belief, you can’t claim initial repairs after you buy your property. Even to get it ready for lease. This is because when selling you then factor these in to your capital gains. Talking about capital gains…
Reduce your Capital Gains Tax
You can reduce the tax payable by 50% if you bought your investment after 21 September 1999 and have held it for more than 12 months. And in some instances, you can even roll over this expense until another CGT event. This article is like the Christmas present you always wanted, right?
For the negative gear fans, there is the option of taking out an interest-only loan. This is what it sounds like. You only pay back the interest on a loan and rely on the capital growth of the property. This keeps interest expenses high and as such helps your efforts to offset your overall taxable income. This is a risky approach because it relies on a strong market and strong growth. Over a five-year period of only paying interest and not making a dent to your principal loan, you want to be sure that your property value has increased.
Please get help
Remember ‘Keep Your Receipts’? Well, the whole reason you do this is so you can give them to your best friend: an accountant. Their fees are tax deductible and a great accountant will help you find all the possible ways in which you can manage the taxation of your investment.