Category: "Rental Properties"

Beware – many people are incorrectly claiming rental property travel as a tax deduction!

November 30th, 2013

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Rental property travel – when is it tax deductible?

On the face of it, there seems nothing hard about claiming rental property travel as a tax deduction. Other than working out which motor vehicle method you’re going to use, or what percentage of airfares you’re going to claim, it’s simple, right?

Claiming travel as a tax deduction against your rental property is not simple, and landlords need to make sure they are getting it right! Because when a taxpayer incorrectly claims travel against their rental property, it’s painfully obvious to the Tax Office…

So how do you get it right?

Your travel claim is going to vary depending on the nature of the trip. Some trips will be an outright deduction in the year they are undertaken, and some trips will need to be added to the cost base of your rental property as a capital expense. To get it right, I suggest going out and buying yourself a good quality notebook that you can use to record travel relating to your property. Split your travel according to the following seven headings:

1. Travel to look at a property you are considering buying

Travel to look at properties you don’t own occurs too soon to be related to the earning of any income and will ,therefore, NEVER be tax deductible.

2. Travel to undertake initial repairs BEFORE the first tenant moves in

Rental property repairs will be tax deductible when they are incurred during the period the property is ‘held, occupied or used’ for income producing purposes, and they are attributable either to damage that occurs during the income producing use of the property or to defects that emerge suddenly during that time.

Now read this previous paragraph again and take note of the sections highlighted in bold letters. Note that initial repairs or renovations to rectify damage that existed at the time of purchasing a property does not fall under this definition. The repairs relate to the previous owner of the property, fall under the definition of capital, and therefore need to be written off over 40 years as a capital works deduction. This remains true regardless of whether you let a tenant move in, wait six months, and then undertake the repairs. If the damage was not caused by your tenant then it’s not an outright tax deduction. It’s that simple!

Following on from this, if initial repairs are not tax deductible, then any associated travel will also not be tax deductible. The travel relates to capital improvements and, therefore, must be added to the cost base of the property, decreasing any capital gain when the property is eventually sold.

WARNING: The Tax Office keeps a watchful eye over large repair claims and associated travel claims in the first year of owning a rental property. The majority of times these repairs relate to the previous property owner and should not have been claimed as an outright tax deduction.

3. Travel to undertake improvements on your rental property

Normally something will fall into the improvement category when you start replacing the entire asset or you start changing the nature of the asset. Examples of improvements are:

– Replacing the entire roof

– Replacing the entire fence

– Replacing ALL the electrical wiring

– Replacing ALL the plumbing

Improvements are not an outright tax deduction in the year the work is carried out. They are capital in nature and eligible to be written off over 40 years as a capital works expense. Therefore, any associated travel will also not be an outright tax deduction. This includes travel to your property to watch over the project, travel to the hardware store for materials, and travel to meet with contractors. Any travel associated with capital works must be added to the cost base of the property and used to decrease future capital gains.

4. Travel to undertake repairs that were caused by your tenant

Expenditure on repairs made to a rental property that relate directly to wear and tear or other damage that occurred as a result of renting out the property are generally allowable as a tax deduction in the year the works were carried out. Therefore, travel to the rental property to undertake repair work, visit the hardware store for supplies, or visit contractors for quotes, will also be tax deductible in the year the trips are undertaken.

5. Travel to collect rent

If you manage your own property, you can claim trips to collect the rent as a tax deduction in the year the trips are undertaken.

6. Travel to maintain the property

Travel to do general cleaning and gardening will be tax deductible in the year the trips are undertaken.

7. Travel to inspect the property

Travel to inspect your property is the most common travel claim for landlords. The Tax Office normally views 2 – 4 inspections per year as fair.

You will need to approach this claim with caution. If the intention of your travel was to drive to the city to do some shopping and you thought you might drive past your property at the same time, the travel is really private in nature. Driving past the property was just incidental to the main purpose of the trip which was to do the shopping. Same with flying interstate to inspect your property. Study the purpose of the trip and the works you are carrying out while you are there very carefully. Driving past your rental property for 5 minutes while on a two week interstate holiday may not cut it with the tax office!

My Final word

As you can see, travel relating to rental properties is not black and white. And we haven’t even attempted to go over the different methods of claiming travel in this article. The Tax Office keeps a close eye on the dollar amounts that are placed in the repair and travel boxes of rental property tax returns. They also match these boxes with the date that the property was purchased. I don’t mean to scare my readers, but you really can’t afford to get it wrong.

If you own a rental property and you’re going to lodge your own tax online, then be careful. A normal person who is not working in tax law will find it hard to distinguish between an improvement and repair. I recommend that you find a good accountant that can walk the rental property journey with you. If you really want to lodge your own tax online, then you should approach any works carried out on your rental property with caution. If in doubt, lodge a Private Binding Ruling with the Tax Office.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

Eight reasons why you should build a rental property.

November 17th, 2013

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Eight reasons why you should build a rental property.

 

So you’re keen to jump into the rental property market, but unsure where to start.  Building a rental property will consume your life for 12 months and possibly cause some sleepless nights, but there are definitely some rewards at the end that can make it all worthwhile.

1.  The first and most obvious reason for building a rental property is the fact that once the property is built, major repairs will virtually be non-existent for the next several years.  This means you won’t have to deal with unhappy tenants and you won’t be spending your time chasing plumbers, electricians and repair men.  If you’re still not convinced, then consider the loss of rent if you have to move your tenants out while you do renovations to an older home.  Someone will still need to meet the mortgage repayments.

2. New homes come with a builder’s structural warranty that lasts anywhere up to 50 years.  Need I say no more!

3.  A new house is clearly going to be attractive to tenants and a lot easier to rent.  Advertising for new tenants costs money, and in the mean time you are left to cover the mortgage payments while waiting for the new tenant to move in.

4.  New homes can end up costing you a lot less in the long run.  This advice might contradict everything you have been told in the past.  But when you hear a real estate agent say that it’s cheaper to buy an existing home, they are not taking into account the years of repairs and renovations that often need to be done to existing homes.  How many times have you seen friends rave about buying a house for a bargain, only to watch them start extending and renovating 10 years later at astronomical prices?  If any of you have ever compared the cost per square metre to build compared with the cost per square metre to do a renovation on an existing house, you would know that the cost to renovate is almost double.

5.  When you build a new house you will only pay stamp duty on the cost of the land.  This can amount to considerable savings.

6.  By building you get to personalise the house exactly how you want it.  Many people buy a rental property with plans to move into it later down the track when they retire.  But when the time finally comes, they end up spending an obscene amount of money to renovate the house back to a standard they are comfortable living in.  Build that perfect house now, rent it out, and when you are ready to downsize and move into it, besides a lick of paint, you won’t need to lift a finger.

7.  If you purchase a block of land with the intention of building a rental property, then interest on loans, council rates, water, land tax and emergency services levy will all be tax deductible from the moment the land contract settles!  This means negatively geared losses to offset against your taxable income resulting in a higher tax refund which can be used to help with the building process.

8.  Brand new properties are much more tax effective than older established homes, and it’s much easier to end up with a positively geared property.  A positively geared property is one where your income (including your tax refund) exceeds your out-of-pocket expenses.  This is because properties built after 1987 receive what is called a Capital Works Deduction.  This means you get to depreciate the cost of building the house at a rate of 2.5 percent over 40 years.  That can amount to a very large tax deduction you won’t get with an older home.  On top of that, your house is full of brand new plant & equipment that can be depreciated at rates of up to 40 percent, resulting in even more tax savings.

My final Word

There are definitely disadvantages when it comes to building that haven’t been covered in this article.  If you’re embarking on a rental property journey, building is by far the hardest road to take.  The hardest road, however, tends to reap the biggest rewards, and once you have built and the tenant is inside, things will settle down.

For many people, the time involved in building a rental property means it won’t be an option.  If the time and effort are something that you don’t have to give, I would consider looking at house and land packages instead.  Buying a brand new house that someone has already built will give the same tax savings as building your own.

At the end of the day, unless you’re a property guru, don’t try and walk the rental property road alone.  Finding an experienced accountant that can hold your hand will be worth its weight in gold.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

The truth about rental property repairs and claiming a tax deduction!

November 16th, 2013

 

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The truth about rental property repairs and claiming a tax deduction

A rental property should be treated like a small business.  You need to monitor your cash flow, keep appropriate records, and know what you can and can’t claim as a tax deduction.  For the majority of expenses, you don’t need to be Einstein to figure out what is tax deductible.  Trying to work out the difference between a repair and an improvement, however,  is not so black and white, and dare I say Einstein may have had a hard time differentiating between the two if rental properties existed back in his day.

It can also be a grey area of tax law, and a constant source of frustration for landlords who run off to undertake repairs and renovations to their properties, only to find out later that the expenses are not eligible for an immediate tax deduction.  This is a long blog, but such an important topic, that it warrants the length of this article.  So pull up a chair, grab a coffee and read on!

When will an expense be a repair, and more importantly when will it not?

Repairs

According to the tax office a repair is work to make good or remedy defects in, damage to or deterioration of the property.

For example:

  • Replacing part of the guttering or windows damaged in a storm
  • Replacing part of a fence that got damaged in a storm
  • Repairing electrical appliances.
  • Repairing existing plumbing
  • Repairing part of the roof

Maintenance such as painting, maintaining plumbing, and maintaining electrical work will also fall under the banner of a repair

Notice the examples above all have a repetitive element to them.  They each highlight the fact that the work carried out was only to a small section of the asset.  For example, a section of the entire roof, or a section of the entire fence.  This is probably a good gauge.  If you stop replacing sections of things or parts of things and suddenly start replacing the whole thing in its entirety, your gut instinct should tell you that you have jumped into asset replacement territory, and therefore the expense will no longer be classed as a repair.

 Improvements

A repair will turn into an improvement as soon as you start replacing the entire asset or changing the nature of the asset.

Examples of improvements are:

  • Adding an additional room
  • Replacing all existing plumbing
  • Replacing all existing electrical wiring
  • Renovating the entire kitchen
  • Replacing an entire roof

Improvements will be treated as a capital expense by the tax office and should be depreciated over their expected life.  Generally any improvements that form part of the house and cannot be detached such as a new roof, bathroom renovation or house extensions, can only be depreciated at 2.5% over 40 years.

Replacement of assets that are detachable from the house such as ovens, hot water systems, carpets and curtains can be depreciated at much higher rates depending on the asset and can even be claimed as an outright tax deduction if the asset cost is less than $300 (or $600 for joint tenants).  If you want an indication of what your depreciation rate may be then I suggest you jump over to this Free Australian Tax Depreciation Rate Finder.  I love this website.  Just plug in the name of the asset and it instantly tells you the depreciation rate.

 

Commonly asked questions about repairs:

1.  “I have just purchased a rental property.  Can I do some repairs before the tenant moves in and claim a tax deduction?”

To claim an outright tax deduction for repairs and maintenance, the damages must have been caused by your tenant.  If you have just purchased the property and never had a tenant in the house, then clearly you won’t have a leg to stand on.  The good news, however, is that these expenses will be classed as capital, and you can depreciate them over their useful life.

2.  “What if I purchase the house, let the tenant move in and then do the repairs six months down the track?”

A word of caution here.  Be very careful about doing repairs to a rental property in the first 12 months after the property is purchased.  The tax office closely monitors landlords with large repair claims in their first year of operation.  The majority of the time these repairs actually relate to damage that was already evident when the landlord purchased the property.  You can’t claim repairs as a tax deduction that were caused while under the watch of the previous home owner.  The ATO will automatically reclassify these expenses as capital and you will need to depreciate them over their useful life.

3.  “I have owned a rental property for 12 months.  My tenant has just moved out, and I would like to do some quick repairs before the next tenant moves in.  Can I claim the repairs as a tax deduction?”

You can claim repairs to a rental property while no tenant is living there, as long as the repairs relate to one of your previous tenants.  In fact, it is very common for landlords to give the property a quick coat of paint and repair minor broken items in-between tenants. If the tenant is not jumping up and down for things to be fixed, waiting till they move out is probably the best time to do it.

4.  “Is it possible to replace an entire asset in small bits progressively over several years, claiming each stage as repairs and therefore an outright tax deduction?”

For example, can you replace the entire fence by doing a section at a time over several years, and claim each section as a repair when the work is carried out?  The answer is YES!  Although, be warned this is a very grey area of tax law.  If you’re interested in reading more on this topic, you can start at TR 97/23 Paragraph 43.

 My final word

It’s imperative that if you’re planning on buying a rental property that needs some repair work and renovations done, that you visit an accountant to make sure you are clear on what is going to be tax deductible upfront in the year of purchase, and what will need to be written off over the life of the asset.  These calculations can make a huge difference when crunching numbers to determine if the property falls into the range for an ideal investment property.  It will also play a massive part in your decision regarding how much you’re prepared to pay for the property.

If you’re a do it yourself tax preparer, who loves taking control of your own tax affairs, then this is the tax ruling you need to get your head around if you want to start self-assessing whether an expense is a repair or an improvement: TR 97/23.  If you’re having difficulty making a decision, then I suggest seeking a private binding ruling from the Australian Taxation Office.  See my article on lodging private rulings.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

 In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

Rental Property Tax Deductions That I Bet you Missed in Your Last Tax Return

August 11th, 2013

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Rental Property Tax Deductions

Internet – the internet can be used to organise repairs, order and pay for new assets, send and receive emails, undertake research relating to property investment, and for using online software to record your property rent and expenses.

Computer/laptop/iPad/printer– if you manage your rental property records on your computer, or you use your computer to access the internet in relation to your property then you can claim it as a tax deduction.   If you regularly use your printer to print documents in relation to your property then this will also be a tax deduction.

Computer Software – if you purchase special computer software to record your rent and expenses then this will be tax deductible.  Many property owners choose to use Microsoft Office, Word, and Excel to keep a record of transactions relating to their property.  If you decide to do this and want to claim it as a tax deduction, just make sure you apportion your claim taking into account the amount of time you use the software for private purposes.  

Stationery/Postage – if you need to post documents or buy stationery that relates to your investment property, then you can claim this as a tax deduction. 

 

And a final word

Remember that you must apportion your claims between private use and rental property use.   For computer and associated internet expenses the tax office suggests keeping a diary for 4 weeks to record private use and rental property related use.  This percentage can then be used as a basis to work out your claim for the entire year.  Note that you will need to do a new diary every year.

I recommend

As always I recommend heading over to the Australian Taxation Office website and reading up on rental property tax deductions yourself.  This is the handout that every rental property owner should not be without!  I also recommend that you find yourself a good accountant that specialises in rental property tax deductions.  You should not attempt to lodge your own tax online if you own a rental property.  There is way too much you can miss and way too much money to lose!

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

Amazing money saving tips that every rental property owner should know

July 27th, 2013

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Amazing money saving tips that every rental property owner should know

 

1.  Save tax by getting a Depreciation Report done by a quantity surveyor.  The surveyor will visit your rental property and identify, measure and cost any depreciable items of plant and equipment.  They will also identify whether the cost of constructing your house is eligible for a capital works write off.  For newer homes, a depreciation report can result in an extra $5,000 – $10,000 in tax deductions in the first year alone.  And just because your house is older it doesn’t mean it’s not worth getting one done!  I often hear clients say that they have been told by other accountants it’s not worth obtaining a report if your house is old. 

Check out BMT’s website for advice on Depreciation Reports.  I  have used BMT on a number of occasions to obtain Depreciation Reports, and I can’t recommend them enough.  Not only are they good, but they offer a guarantee – they find double their fee in deductions in the first year, or you don’t get charged.  With BMT, you really don’t have a lot to lose – old house or new house!   

Note that if your surveyor finds you have not been claiming or maximising your entitlements, then your accountant can go back and amend your last 2 years tax returns. 

 

2.  Carry out your own repairs rather than hiring contractors.  Not only will you save money, but the cost of traveling to the hardware store to buy tools and equipment as well as travel to your rental property to carry out the repairs will be tax deductible.

 

3.  Manage your own property.  Not only will managing your own property save on agent costs, but it will also allow you to increase the amount you can claim as a tax deduction for travel.  When you manage your own property, you can claim a weekly trip to your rental property to collect the rent.

 

4.  Normally assets costing more than $300 are not an outright tax deduction and will need to be depreciated over the life of the asset.  However, if you have a rental property that is owned jointly with your spouse, then you can claim the cost of an asset up to $600 as an outright tax deduction.  Make use of this by keeping an eye out for specials on things like new ovens, hot water systems, blinds and carpet.  When possible, aim to pay no more than $600

 

5.  Have you received a big bonus from your boss this year, or do you own a small business that for whatever reason is going to have a boomer year?  If you’re expecting your income to be higher than normal, then consider bringing forward some rental property expenses to increase your negatively geared loss and offset some of that income.  You can prepay up to 12 months in advance on rental property expenses such as mortgage interest, insurance and council rates, and claim it as a tax deduction in the year it’s paid.

 

6.  Be organised and save money on accounting fees.  Most accountants charge extra to prepare a rental property schedule for a client.  How much extra will depend on the time taken to complete the tax return and the amount of receipts a client has in their shoe box.   A rental property is no different to owning a small business – you need to be organised!  There are software packages designed especially for landlords to record their income and expenditure.  An excel spreadsheet is also an inexpensive idea and your accountant will love you for it.  If you have a real estate agent that manages your property then make sure you get a 12 month summary from them before you visit your accountant.  If your accountant has to add up each monthly rental statement, your accounting bill will go through the roof.

 

7.  Have you had a rental property for a while?   Are you really starting to struggle during the year when you keep putting your hand in your pocket to top up the mortgage, while patiently waiting for year end so you can receive a tax refund?  Consider lodging a PAYG Withholding Variation with the Australian Taxation Office and receive your tax refund spread out in your weekly pay packet, rather than receiving it at the end of the year.  You can lodge this variation yourself online through the Australian Taxation Office website, or your accountant will be able to do it for you.

 

This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

 In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.

 

Rental Property Owners – Increase Your Tax Refund

June 22nd, 2013

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Rental property owners – increase your tax refund

Only 2 weeks left till the end of the financial year.  If you are a landlord and you haven’t done so already, now is the time to get your accounts in order and look at bringing some of your expenses forward so you can increase your tax refund.

Here are my top tips to increase your rental property loss and receive a higher refund:

  •  Prepay up to 12 months insurance in advance.
  • If your rental property is a considerable distance from where you live, consider bringing forward any routine inspections or trips to undertake property repairs to increase your travel claim prior to 30 June.  
  • If you pay a real estate agent to look after your property, check to see if there are any expenses that they can bring forward such as paid inspections.
  • Deferring the collection of rent may not be an option for everyone.  For those of you that can make this work, its certainly worth considering.
  • Was your house constructed post July 1985.  Has your house had any major additions added since July 1985 such as pergolas or extra rooms. If you answered yes then obtaining a quantity surveyors report may allow you to access greater deductions for depreciation.  If you think you may be eligible and you haven’t already obtained this report, it is imperative that you speak to your accountant now.  You still have time before June 30.
  • Is your property due for a pest inspection.  If so get it done now.
  • Get your tenant to give you a list of any little problems that could potentially become big problems in 6 months time and fix them NOW.  Remember, small replacement assets costing less than $300 (or $600 for a jointly owned property) can be claimed outright in the year they are purchased.
  • Pay any outstanding rates, water and land tax prior to June 30
  • If you have a mortgage over your property, then you can pay up to 12 months interest in advance and claim it as a tax deduction.  Clearly this option requires the landlord to have extra money at hand so it will not be for everyone. 

 

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This information, facts, insights and ideas (“Content”) are for general informational purposes only and nothing contained in it is or is intended to be, construed as advice. It does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon or treated as a substitute for specific or professional advice. You should, before you act or use any of this Content, consider the appropriateness of this information having regard to your own personal objectives, financial situation and needs. It should not be your only source of information but should be treated as a guide only. You should obtain your own independent professional advice before making any decision based on this information.

In no event will we be liable for any loss or damage including and without limitation, indirect or consequential loss or damage, or any loss or damage howsoever arising from, out of, or in connection with the use of this Content.