Want to know how to make the most of your tax return? Here are five important things you can do to help maximise property depreciation on your investment property and put more money in your wallet at tax time.
1. Stay on top of your statements and receipts
When it comes to maximising your property tax depreciation, it pays to be organised throughout the year. Stay on top of your monthly statements. If you track your statements and receipts on a spreadsheet or accounting program as they roll in, you won’t have a big, messy shoe box full of papers and receipts to deal with at the end of the year.
It’s also important to keep things separate between your investments and principal place of residence – one is deductible and one is not. For example, using a separate credit card for all purchases on your investment property can help you keep track of your claimable expenses much more easily.
“Keep things separate between your investments and principal place of residence.”
2. Claim the full amount every year with a property depreciation schedule
A proper depreciation schedule will project your deductions for each year. Once it’s done, it’s simply a matter of getting the correct number for that year and applying it to your tax return. However, you do need to watch out for any changes to the property that could affect your tax return outlook.
If you’ve renovated the property, be sure to take advantage of scrapping deductions on any items you’ve thrown away – a lot of people of miss this. And of course, be sure to count the new improvements you’ve made to the property. This is not to be confused with repairs and maintenance, which are instantly claimable. Capital improvements need to be depreciated over time.
3. The benefits of prepaying interest
There are positive and negatives to prepaying your loan interest. On the plus side, you get a tax deduction now, instead of in the future. Additionally, if your tax bracket is going to reduce in the following year, there may be a benefit to prepaying your interest so you can claim it at the higher rate. The downside of prepaying is that you won’t have use of the money for other purposes – so be sure to weigh the pros and cons on your tax return.
“A benefit of prepaying your interest is you get a tax deduction now, instead of in the future.”
4. Capital gains tax considerations
The property depreciation claims you make while you own your property do affect the capital gains tax (CGT) you pay at the end. When you make a depreciation deduction, you claim it at your full marginal tax rate. When you sell the property, your cost base will be reduced by some of the claims you made, which means your capital gains tax liability will be higher. However, because money today is worth more than money tomorrow, claiming property depreciation generally gives you more on the way through than what you pay at the end. Don’t forget that there are some great CGT exemptions available such as the fifty per cent discount if the property has been held for over twelve months which can also help you save when it comes time to sell.
5. Get the right advice
You’re investing in property with the purpose of building wealth, which includes your cash flow as well as future gains. A part of cash flow is making sure you’re getting the maximum legitimate depreciation on your property. Around 80% of investors fail to maximise their property depreciation because they don’t understand it or mistakenly believe that their property is too old to claim anything. To ensure you don’t miss out on any valuable deductions, it pays to get expert advice from a qualified Quantity Surveyor.
“Around 80% of investors fail to maximise their depreciation.”
Maximising your property depreciation can help boost your tax return and cash flow. If you have any questions about property depreciation and what you can claim, be sure to consult with your financial advisor and a qualified Quantity Surveyor for advice.
This article was first seen on www.realestate.com.au and you can view the article at www.realestate.com.au/blog/property-depreciation-and-your-tax-return/.