» Depreciation

How property investors can prepare for the new financial year

BMT team — Thu, 06 Jul 2023 05:56:58 +0000

With the arrival of the new financial year, property investors have a prime opportunity to assess their investment strategies and make smart financial decisions. One important aspect to consider is the use of depreciation deductions, which can significantly improve the profitability of an investment. In addition to depreciation, there are several other strategies which can help property investors enhance their investment returns. In this article, we explore how the following can help investors prepare for the new financial year: Understand depreciation and the importance of claiming Engage a quantity surveyor Evaluate property improvement opportunities Review investment loan structures and interest rates Seek expert financial advice 1. Understand depreciation and the importance of claiming Depreciation is the natural wear and tear of a property and the assets within it. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim depreciation as a yearly tax deduction. Depreciation is claimable on a building’s structure and permanent assets, referred to as capital works deductions (Division 43). Depreciation is also claimable on the easily removable or mechanical assets, referred to as plant and equipment depreciation (Division 40). Residential houses generate forty years of capital works deductions which are available from the construction completion date and depreciate at a rate of 2.5 per cent per year unless the property commenced construction before 26 February 1987 and after 18 July 1985, in which case the rate is 4 per cent per year. Plant and equipment assets are depreciated over their effective life, with the rate of depreciation determined by the investor’s chosen method: diminishing value or prime cost. Investors can select the diminishing value method, which allows higher deductions earlier in the asset’s effective life, or the straight-line or prime cost method, which distributes deductions more consistently throughout the asset’s effective life. Changes to depreciation legislation in 2017 mean owners of second-hand properties are no longer eligible to claim deductions for previously used plant and equipment assets if the property is purchased after the 9th of May 2017. This doesn’t affect brand-new properties or newly purchased assets. By claiming depreciation, investors can reduce their taxable income, leading to an improved tax return and improved cash flow. 2. Engage a quantity surveyor Understanding depreciation and the importance of claiming is important, however, it’s also important to engage a qualified quantity surveyor, such as BMT Tax Depreciation. Quantity surveyors are one of the few trained professionals that hold the training required to accurately calculate construction costs. A quantity surveyor will identify all depreciable assets within a property and determine their depreciable value. Their expertise and knowledge of the latest legislation changes will ensure property investors maximise their deductions compliantly. BMT Tax Depreciation conduct physical site inspections, so that all schedules are maximised and fully compliant. Our data from inspections show that 66 per cent of residential investment properties have had some form of renovation or addition that qualify for depreciation. 3. Evaluate property improvement opportunities The new financial year presents an excellent opportunity for investors to assess an investment property for potential improvements. Investors should consider renovations or upgrades which could enhance the property’s value, increase rental income, or improve energy efficiency. These improvements will likely qualify for additional depreciation deductions. It’s important to keep in mind that different improvements will generate varying deductions in both divisions. Investors should consult their quantity surveyor or accountant to determine which improvements will best meet their goal intention, whether this is to increase deductions or to complete surface-level improvements to increase rent. 4. Review investment loan structures and interest rates Investors can take advantage of the new financial year by reviewing their investment loan structures and interest rates. Consulting a mortgage broker or financial adviser to explore opportunities for refinancing or renegotiating lower interest rates can reduce interest expenses and improve cash flow while also increasing the overall return on an investment. Investors should consider whether restructuring an investment loan, switching to a different lender or renegotiating terms can better align them with their investment goals. For instance, an interest only loan with offset accounts could reduce repayments while interest rates are comparatively high. 5. Seek expert financial advice Navigating the complexities of property investment and taxation requires professional guidance. Investors should seek advice from a qualified accountant, financial adviser and quantity surveyor who specialises in property depreciation. These professionals will provide personalised strategies tailored to an investor’s specific situation, ensuring compliance with tax laws while maximising deductions. By taking a proactive approach, staying informed, and leveraging professional expertise, property investors can position themselves to successfully reach investment goals in the new financial year. Property investors wanting to prepare for the new financial year by claiming maximised depreciation should get in touch with BMT on 1300 728 726 or Request a Quote.

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Office renovation depreciation – case study and tax benefits

BMT team — Tue, 19 Apr 2022 06:54:06 +0000

With ‘working from home’ arrangements more commonplace since the start of the pandemic and social distancing now the norm, many businesses have recently altered their office layouts. Office renovation depreciation has always offered lucrative tax deductions. But since temporary tax depreciation incentives were introduced, office renovation has become even more attractive for the businesses that occupy them. In this post we discuss what’s happened in the office sector since the onset of the pandemic and look at an office renovation depreciation case study. Contents: Demand for office space since the pandemic Office renovation depreciation case study Demand for office space since the pandemic Since early 2020, companies have been faced with the incredible challenge of shifting their office-based employees to working from home arrangements, to adhere to state-mandated COVID-19 rules put in place to protect peoples’ health. Lockdowns and work from home orders lasted for months in some states, resulting in a great deal of office space going unused for prolonged periods. Many people held the expectation that more businesses would continue to employ either a full or hybrid working from home model, leading them to think that ongoing demand for office space would be lower than pre-pandemic. And while there was a sharp drop in demand initially, what is interesting is that demand for office space has rebounded, despite working from home arrangements still being in place for many businesses. Ken Morrison, Chief Executive of Property Council of Australia, said “While aggregate vacancy levels have risen slightly from 11.9 per cent to 12.1 per cent, the driver of this has been new supply of office space, not a drop in demand. The reality is that most CBD businesses continue to see the office as integral to their future, and that is reflected in the increased demand for office space over the past six months.” So, what is driving this demand? It appears that many businesses are not just growing in staff numbers but are needing more space to accommodate for social distancing measures, even in those businesses where employees work remotely for part of the week. While we can’t predict how long this will continue, we can rely upon the lucrative depreciation deductions available on office buildings and fit outs. Depreciation case study ‘Business A’ is a medium-sized business entity. It leases office space occupying a partial floor of a Sydney office tower. The space was originally fitted out in 2018 (prior to the COVID-19 pandemic) and is now going to be expanded to accommodate larger collaborative workspaces, social distancing and future growth in head count. The following table demonstrates the depreciation deductions available for the owner of the property (the landlord) and the business operating from it (Business A, the lessee). These deductions provide a healthy boost to cash flow for both Business A and the landlord. Note the large boost in deductions for Business A in year five, which takes into account the instant asset write-off for some of the new fit out. Some of the larger immediate deductions available to Business A from the Year 5 expansion include $60,000 for computer equipment, $33,000 for floor coverings and $14,000 for desks. Meanwhile, the landlord can continue to claim capital works deductions and plant and equipment depreciation on items such as air conditioning, lighting, switchboards and automatic doors. Tax depreciation schedules are key to claiming the maximum depreciation deductions. A BMT Tax Depreciation Schedule ensures commercial depreciation deductions are claimed to their full potential and compliantly by applying all industry-specific legislation. BMT also adopts current business incentives including the backing business investment and temporary full expensing depending on the business size, to ensure every cent is claimed. BMT Tax Depreciation has optimised its commercial process to ensure both owners and tenants claim the most deductions possible. To learn more about commercial depreciation of offices, call BMT today on 1300 728 726 or Request a Quote.

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Property Market Update 2022

BMT team — Fri, 28 Jan 2022 02:16:37 +0000

The pandemic pushed Australians to their limits in 2021, but we remained staunch – as did the housing and property market. Read on for a recap of events in last year’s property market and watch the video to hear the thoughts of our CEO, Bradley Beer. Contents: National property market prices Rental yields Finance and interest rates National property market prices The property market in Australia finished the year with strength. At the end of December 2021, Australian dwelling values were 22.1% higher than in December 2020, coming off a cyclical high of 22.2% in the twelve months to November. Australia’s inflated property market is now valued at more than $9 trillion, a record high after surging home prices through the pandemic lifted the value of residential property by $1 trillion in the past six months alone. Rental yields With national property values recording an annual rise of 22.1% compared with a 9.4% rise in rents, rental yields have decreased as a natural consequence. Gross rental yields fell to a new record low across Australia, reaching 3.2% in December. The lowest yields, by some margin, remain in Sydney (2.4%) and Melbourne (2.7%), however, except for Perth and Darwin, every capital city is recording record low yields. Finance and interest rates Following its December meeting, the RBA kept the Official Cash Rate at the record-low of 0.1 per cent. Concerns about property affordability have risen to the highest-ever level in the latest ANZ/Property Council Survey, with respondents saying soaring prices and increasingly unequal access to home ownership make it the number one issue for governments to address. The powerful Reserve Bank-led Council of Financial Regulators has maintained its watching brief over the hottest property market in over three decades, saying it continues to “closely monitor” the impact of the higher interest rate buffers imposed in November. Hear more from our CEO, Bradley Beer.

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Have you forgotten to claim depreciation on your rental property?

BMT team — Wed, 22 Dec 2021 21:50:29 +0000

Have you owned a rental property for several years but forgot to claim depreciation? The good news is that yes, you can go back and claim these missed depreciation dollars. What is depreciation? Depreciation is the natural wear and tear of property and assets over time. As a property investor, you can claim your rental property’s depreciation as a tax deduction each year. Depreciation is claimed under two categories. The first is capital works, this is claimable on the property’s structure and fixed assets such as walls, doors, kitchen bench tops and tiles. The second category is plant and equipment, which includes the easily removable and mechanical assets like floor coverings, hot water systems and air-conditioning units. What do you do if you forgot to claim depreciation on rental property? There are several reasons why investors don’t claim depreciation. Sometimes they simply don’t know that the deductions exist, while others don’t believe it’s available to them. Whichever the case, it’s important to always seek advice from a specialist quantity surveyor, such as BMT. They will be able to determine the depreciation available and hence, whether it’s worth back-claiming any missed deductions. Most of the time the answer will be yes. Once BMT gets the green light from you they will make a start on preparing the schedule and organise a physical site inspection. Is it hard to back-claim? It’s not necessarily ‘hard’ to claim back missed dollars, but your accountant will need the documentation to ensure it is done correctly and to substantiate any back-claim that is made. Therefore, a tax depreciation schedule is so important. The schedule itself will show deductions available per year starting from the date of purchase allowing your accountant to amend previous tax returns so you can claim back those missed dollars in depreciation deductions. In some scenarios, your accountant will be able to go back and amend multiple years but this can be difficult to do without a comprehensive tax depreciation schedule that provides the deductions available in previous years in line with legislative requirements. Is there a limited dollar amount that you can claim back? There isn’t a capped amount that you can claim when you’ve forgotten to claim depreciation on your rental property. It all comes down to how much has been missed and what is proven with the tax depreciation schedule. For example, if you missed claiming since the 2019/2020 financial year and each year’s depreciation deduction was approximately $10,000, the entire amounts for each year can be claimed against the corresponding tax return. What happens if you complete a renovation after the schedule is prepared? Renovations can come unexpectedly. Sometimes the need for renovation is due to extensive damage that can’t be fixed with straightforward repairs, while other times it could simply be done to increase the rental return of the property. When a renovation is made, it’s easy to make amendments to existing tax depreciation schedules with BMT. The team will simply get the details of the renovation and update the schedule for a small fee. To learn more about depreciation and what to do when you forget to claim it on your rental property, contact BMT today on 1300 728 726 or Request a Quote.

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How to calculate depreciation for a rental property

BMT team — Tue, 13 Jul 2021 23:53:41 +0000

Claiming a tax deduction is usually straight forward – you simply record how much an item cost and then deduct it. But what about depreciation, which has no initial outlay and therefore no recorded cost? In this article, we will cover: What is depreciation and how it’s calculated How to calculate depreciation for capital works How to calculate depreciation for plant and equipment Why an expert is needed What is depreciation? Depreciation is the natural wear and tear of property and assets over time. While everything depreciates, only owners of income-producing properties can claim it as a tax deduction. It can be claimed on the eligible structure and fixed assets of a property (capital works), and easily removable and mechanical assets (plant and equipment). As one of the highest tax deductions available, depreciation can make a significant difference to an investor’s cash flow. How to calculate depreciation for a rental property Depreciation isn’t an upfront cost, in fact, it’s a ‘non-cash’ deduction as no money needs to be spent to claim it. Therefore, more thought needs to be put into claiming it correctly. The Australian Taxation Office (ATO) has set methods of calculating depreciation and the easiest way to understand how it all works is by breaking it down via its two categories. How to calculate depreciation for capital works Capital works deductions are generally deducted at a fixed rate of 2.5 per cent for a forty-year period. The following calculation demonstrates how it works. Capital works deductions in practice: Lisa purchased a new investment property in 2020. Her property’s capital works deductions were based off a value of $380,000 which encompassed the value of the property’s structure and fixed assets. Assuming no further capital works improvements are made, Lisa can claim $9,500 in yearly capital works deductions until 2060 (forty years) Full year capital works deduction: $380,000 x 2.5 ÷ 100 = $9,500 How to calculate depreciation for plant and equipment Plant and equipment depreciation deductions are calculated differently to capital works. Firstly, each plant and equipment asset has a designated depreciable effective life that is determined by the ATO. For example, a stove holds an effective life of twelve years, while a dishwasher holds an effective life of eight years. Secondly, there are two methods that can be used to calculate plant and equipment depreciation – prime cost, or the diminishing value method. Once a method is chosen for an asset it can’t be changed. Prime cost method The prime cost method, also known as the ‘straight line’ method of depreciation, calculates deductions using a uniform rate. This rate is based off the asset’s effective life. For example, an asset with an effective life of four years will hold a prime cost method rate of depreciation of 25 per cent (100 ÷ 4 = 25). The following shows a basic demonstration of how the prime cost method works in practice. Prime cost method in practice: Chris purchased a digital security camera for the exterior of his rental property. The camera’s depreciable value was $500 and it held an effective life of four years, resulting in a prime cost method depreciation rate of 25 per cent. The annual depreciation deductions would be calculated as follows. $500 x 25 ÷ 100 = $125 Using the prime cost method, Chris can claim an annual depreciation tax deduction of $125 per year for four years on the security camera. Diminishing value method The diminishing value method works very differently to prime cost. Each asset has a diminishing value depreciation rate based on its effective life, which is applied to the undeducted value of a plant and equipment asset, meaning higher deductions in earlier years. Let’s use the previous example to understand how the diminishing value method works. Diminishing value method in practice: Chris investigates the diminishing value method of depreciation for his security camera. Instead of 25 per cent as with the prime cost method, the diminishing value rate was 50 per cent (200 per cent ÷ 4 = 50). The yearly deductions would work as follows. Year one deduction: $500 x 50 ÷ 100 = $250 (remaining undeducted value = $250) Year two deduction: $250 x 50 ÷ 100 = $125 (remaining undeducted value $125) Year three deduction: $125 x 50 ÷ 100 = $62.50 (remaining undeducted value $62.50) Year four deduction: $62.50 x 50 ÷ 100 = $31.25 (remaining undeducted value $31.25) Year five deduction: $31.25 x 50 ÷ 100 = $15.60 (remaining undeducted value $15.60) Year six deduction: $15.60 x 50 ÷ 100 = $7.80 (remaining undeducted value $7.80) Year seven deduction: $7.80 x 50 ÷ 100 = $3.90 (remaining undeducted value $3.90) Year eight deduction: $3.90x 50 ÷ 100 = $1.95 (remaining undeducted value $1.95) Year nine deduction = $1.95 x 50 ÷ 100 = $0.97 Why is an expert needed to calculate depreciation? Understanding how depreciation is calculated is only scratching the surface and a tax depreciation schedule is imperative to claiming depreciation deductions effectively. There are many intricacies involved when preparing a tax depreciation schedule, including several legislative requirements to ensure that all claims are compliant. A specialist quantity surveyor is one of the few professionals recognised as having the skills and knowledge to accurately estimate construction costs for depreciation purposes. They will prepare a comprehensive tax depreciation schedule, for your accountant to determine deductions at tax lodgement time. To learn more about depreciation, visit BMT’s website or Request a Quote.

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Can you claim depreciation on your rental property when selling?

BMT team — Tue, 17 Nov 2020 21:59:32 +0000

Deciding to sell your residential investment property is an important decision. Whatever the reason for selling may be, you must continue to maximise your property’s cash flow while it’s still yours. Claiming depreciation on your rental property when selling is possible, but it can be tricky. In this article we will answer: Can a property still be used as an investment while it’s for sale? Can you still claim depreciation on your rental property when selling? Can you claim partial year depreciation deductions while the property is for sale? What happens after the sale? BMT is here to help throughout your investment property journey First, can a property still be used as an investment while it’s for sale? Yes. How this works depends on the current lease agreement. If your tenant is on a fixed arrangement you must continue to honour this unless a mutual agreement has been reached for the tenant to exit early. This applies to every State and Territory and a new owner must also honour a fixed-term agreement. When the lease is a periodic agreement it works differently depending on which State or Territory the property is in. For example, in Queensland you can give your tenants four weeks’ notice once a contract of sale has been signed, while in Tasmania you can give your tenants 42 days’ written notice. Can you still claim depreciation on your rental property when selling? The property is still costing you money, so it’s important that you continue to do what you can to minimise costs and boost your cash flow. The good news is that if your property is genuinely available for rent, even if it isn’t physically tenanted, you can claim depreciation and all other expenses. The Australian Taxation Office (ATO) has several requirements for a property to be classed as genuinely available for rent. One requirement is when ‘having regard to all circumstances, tenants are reasonably likely to rent it. There’s no doubting that it’s harder to attract quality tenants while a property is for sale. However, you can introduce some strategies to make it easier like a discounted rental rate or including some utilities like water usage, electricity or internet. Can you claim partial year depreciation deductions while the property is for sale? You can’t predict how long your property will be on the market before it sells. If it’s still genuinely available for rent during this time, don’t forget about partial year deductions. For example, if you put the property up for sale May 2020 and it sold in September 2020, you can claim a full year depreciation deduction for the 2019-20 financial year and a partial year depreciation deduction for the 2020-21 financial year. Partial year deductions boost cash flow by thousands so it’s important to claim them at tax time. What happens after the sale? Once the property is sold and settlement is complete, you can no longer claim depreciation on it. Remaining capital works entitlements pass onto the next owner if they choose to continue to use the property as an investment. They can’t claim depreciation on existing plant and equipment assets in residential properties due to legislation introduced in 2017. Another factor to consider after sale is capital gains tax (CGT). This is a tax charged on the profit, or capital gain, made from the sale of an income-producing asset. Several factors affect how much CGT is available, discounts and exemptions can also apply. CGT is very complex, and the key step is to discuss the topic with your accountant both before and after the sale. They are experts in this area and will provide further guidance. BMT is here to help throughout your investment property journey BMT Tax Depreciation can help you make the most from your investment property. You can take advantage of depreciation deductions at any stage in your investment property journey, ensuring your cash flow is maximised to its full potential. To learn more about how you can benefit from claiming depreciation, call the BMT Team on 1300 728 726 or Request a Quote.

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Claiming depreciation following a disaster

BMT team — Thu, 12 Nov 2020 00:49:24 +0000

There is no doubting that natural disasters have rocked Australia in 2020. It’s key that property investors know how they can deal with the destruction of their rental property from a taxation and depreciation point-of-view. How and if this can be done largely depends on the insurance proceeds received following the disaster. In this article we will explore: Depreciation with no insurance claim Capital works deductions when insurance claim is made Plant and equipment depreciation when insurance claim is made Rollover relief for plant and equipment assets Insurance proceeds and repairs Depreciation with no insurance claim When there’s no insurance proceeds the property owner can claim depreciation deductions on the new structure and plant and equipment assets once the property has been re-constructed. The owner can also immediately write-off any qualifying un-deducted values on the destroyed assets in the same financial year. Capital works deductions when insurance claim is made Insurance proceeds relating to the structural element of the property will reduce the claim available on any un-deducted division 43 left on the original destroyed structure. Future division 43 deductions will then need to be established. This is done by considering the possible capital gain and any additional insurance proceeds remaining after these adjustments. Another key consideration is how the insurance proceeds were received, for example as cash or as asset replacements. These must be considered in conjunction with other factors under subsection 124B of the Income Tax Assessment Act 1997 (ITAA 97). Plant and equipment depreciation when insurance claim is made The plant and equipment assets destroyed will be subject to a balancing adjustment event. This is where insurance proceeds will be either assessable income if proceeds exceed the un-deducted written-down value, or, deductible if the proceeds don’t exceed the value. It’s common for insurance proceeds to fall into the ‘assessable income’ category as the new plant and equipment asset will usually have a value higher than the older asset’s un-deducted amount. Rollover relief for plant and equipment assets The Income Tax Assessment Act 97 (ITAA 97) covers the involuntary disposal of assets under rollover relief. Depending on the individual scenario, rollover relief may be available. This is introduced when insurance proceeds are higher than the un-deducted values and allows the owner to offset the cost of replaced assets. This effectively reduces the assets ongoing depreciable value, rather than being assessed on the excess from the balancing adjustment and becoming assessable income. When eligible for rollover relief, the owner may end up with a new asset that has a similar opening value as the written-down value of the destroyed asset. Insurance proceeds and repairs Depending on the situation, a portion of the insurance proceeds may relate to deductible repairs to the investment property. For example, if only part of an external cladded wall suffered smoke damage and the owner only had to fix this part of the wall and the rest remained, proceeds would then be classed as assessable income can be claimed as a deductible expense. To ensure they are correctly informed on all tax benefits and liabilities, it’s key to consult with an accountant and a specialist quantity surveyor.

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The Block 2020 unlocks millions in depreciation deductions

BMT team — Tue, 10 Nov 2020 22:43:33 +0000

The Block 2020 has taken the popular show through several firsts. The site experienced a pandemic-induced shutdown, heritage charm from eras such as the 1910s was mixed with modern renovations, and this season also featured the first father-daughter team. BMT Tax Depreciation work with The Block each year to estimate depreciation deductions for the luxurious properties. Like the ones that came before, this season of The Block produced millions in deductions. Contents: A short history of 360 New Street, Brighton Block 2020 depreciation highlights How BMT finds millions in depreciation deductions A short history of 360 New Street, Brighton 360 New Street is in the affluent bayside suburb of Brighton, Victoria. This location has gone through quite a journey before becoming the site for The Block 2020. It was previously a private aged care home that was sold to a property developer. Planning permits on public record show that 360 New Street was originally going to be an estate that held thirteen luxury two-story town houses. However, the property developer sold the site to the Nine Network for close to $15 million before construction took place. Before the contestants arrived, Nine subdivided the block of land and transported five old, run-down homes from different decades to the site. The teams were challenged with the task of renovating the houses to be luxurious, modern properties while keeping elements of the original eras. Block 2020 depreciation highlights BMT Tax Depreciation always finds millions in deductions from The Block properties, and this year was no different. By estimating depreciation on the capital works and plant and equipment assets, BMT show potential investor-buyers what they could claim if successful on auction day. BMT found more than a whopping $14 million dollars in estimated depreciation deductions from this year’s Block properties. The average total depreciation claim for each property is estimated to be almost $2.9 million. Serial challenge winners, Jimmy and Tam, renovated the 1950’s property at 360A New Street. Their property holds the biggest estimated depreciation deductions. BMT has estimated that the maximum total depreciation deductions available from this property would be over $3.2 million. While in the first year alone, it is estimated that an investor could claim a maximum deduction of more than $146,000. Fan favourites, George and Sarah, came in close second with their property fetching an estimated maximum total depreciation deduction of $3.19 million. The major selling point for investors is that they can take advantage of the millions of dollars in depreciation deductions for forty years. How BMT finds millions in depreciation deductions BMT truly leaves no stone unturned. With over twenty years of experience, BMT knows what to look for when completing every type of tax depreciation schedule. During a site inspection, BMT’s specialist staff identify every depreciable asset possible to ensure the owner claims every dollar they are entitled to. When estimating depreciation for The Block properties, BMT looked at everything from the structure, to all assets from the high-end kitchen appliances to furniture and light fixtures. As a specialist quantity surveyor, BMT can estimate the construction costs of the property for depreciation purposes to ensure depreciation claims are maximised and compliant. To learn more about depreciation or get a free estimate of likely deductions from your investment property, Request a Quote or contact BMT on 1300 728 726.

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Understand Airbnb income tax requirements and deductions to get the best return

BMT team — Mon, 03 Feb 2020 00:37:27 +0000

Millions of travellers use Airbnb every year. However, many hosts fail to take full advantage of the depreciation deductions available on their Airbnb investment. By tracking expenses and claiming depreciation, you will make sure your Airbnb is as profitable as it can be. In this article we will explore: What is Airbnb? Advantages of Airbnb hosting Disadvantages of Airbnb hosting Do you have to pay taxes on Airbnb income? Scenarios of claiming depreciation on an Airbnb investment Sole Airbnb Part Airbnb What is Airbnb? From city apartments to luxury camping, Airbnb provides unique short-term accommodation for travellers and an easy way for hosts to make extra income. The share economy is booming in Australia with Airbnb fast becoming a fierce competitor to the hotel industry. Advantages of Airbnb hosting Providing a flexible option for investors, Airbnb allows hosts to control pricing and timeframes throughout the year. Unlike long-term rentals, you can take advantage of peak holiday times by adjusting the rental prices charged. Disadvantages of Airbnb hosting A hotel and an Airbnb operate very similarly, with a high turnover of guests in short periods. Managing the upkeep and cleaning demand of your Airbnb is key to its success. High guest volumes also increase the chance of property damage. Having the right insurance, clear property rules and a security deposit are just some ways of making sure you’re covered for any unexpected surprises. Do you have to pay taxes on Airbnb income? An Airbnb falls under the same tax reporting requirements as any income-producing investment property. When you rent out part or all your property as an Airbnb, you: need to keep records of all income earned and declare it in your income tax return to the Australian Taxation Office by the required deadlines don’t need to pay GST on amounts of residential rent you earn need to keep records of expenses you can claim as deductions. When you sell your investment property, you need to pay Capital Gains Tax (CGT) on the profit made from the sale. Your main residence is generally exempt from CGT. However, if you decide to rent out part of your home as an Airbnb, you’re no longer eligible for the full CGT exemption. This is due to the home being part income producing, CGT is then applied on a percentage basis, commonly based on floor area. Scenarios of claiming depreciation on an Airbnb investment Claiming depreciation on any Airbnb property will make it more profitable. Methods of calculating tax deprecation deductions are significantly different between a sole Airbnb and part Airbnb property. Sole Airbnb You can claim full depreciation deductions on a sole Airbnb for the period it was genuinely available for rent. If you decide to use your own Airbnb for a holiday, can you still claim depreciation? If you stay in your Airbnb for any period, all tax depreciation deductions must be distributed to the time the property was only used for income-producing purposes. Part Airbnb If you only renting out part of your home as an Airbnb, your home becomes a part private and part income-producing dwelling. Many hosts are unaware that they can still claim depreciation on their part Airbnb on a pro-rata basis. The pro-rata calculation is usually based on floor area. You’re also able to claim depreciation for the plant and equipment dedicated to the investment side of the property. It’s important to know that if you decided to rent out part of your main residence as an Airbnb after 1 July 2017, you’re not able to claim depreciation for pre-existing plant and equipment assets. For assets purchased directly for the Airbnb, such as the bedroom furniture, you can benefit from the full tax deduction benefits for the asset’s effective life. Shared area assets, such as kitchen appliances, are only partially deductible and must be apportioned appropriately. To find out more about how depreciation deductions can maximise the return on your Airbnb investment, request a quote or contact the specialist BMT Team on 1300 728 726

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When do you pay capital gains tax on investment property?

BMT team — Sun, 20 Oct 2019 22:13:40 +0000

Capital gains tax is an area of taxation that often confuses property investors. The legislation can appear complex, however it’s important for all investors to have a good understanding of it before selling an asset. Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for. It’s included in your assessable income and taxed at your marginal rate. In this article, we will cover: When do you pay capital gains tax on investment property? How to calculate capital gains tax Capital gains tax methods Capital gains tax exemptions Depreciation and capital gains tax When do you pay capital gains tax on investment property? A capital gains tax (CGT) event occurs when an asset is sold. The timing of this is important as it determines the income year the tax will be applied. For property investors, a CGT event is triggered when you enter into a contract of sale and therefore stop being the owner of the property. The CGT is then applied in the same financial year you sold your property. It’s important to keep thorough records of this process so you can correctly calculate the amount of capital gain or capital loss you make. Property investors are required to keep these records for five years after the CGT event occurs. This is particularly important when you make a capital loss, as the amount can be carried forward as part of unapplied net capital losses. A capital loss does not reduce a taxpayer’s assessable income. Instead, taxpayers are able to offset the loss against a capital gain in the current or future financial years. How to calculate capital gains tax A basic formula for calculating CGT is: Selling price – transaction costs – original purchase price + associated transaction costs = capital gain (or loss) If you have bought and sold an investment property within 12 months, your net capital gain will be added to your taxable income for that year. However, if you have owned an investment property for more than 12 months, there are two methods to calculate your net capital gain – discount and indexation. Depending on eligibility, you can choose whichever method reduces your capital gain the most. Capital gains tax discount method Property investor who have owned an investment property for more than 12 months are entitled to specific concessions when calculating CGT. If you’re an Australian resident and have held the property for more than one year, you’re eligible for a 50 per cent discount on your net capital gain. This reduces your assessable income and therefore the amount of tax you will pay. Capital gains tax Indexation method If you are an Australian resident who purchased an investment property before 21st September 1999, you are eligible to use the indexation method. The indexation method accounts for inflation and therefore calculates your net capital gain based on what your property would be worth in today’s property market. The calculation divides the consumer price index (CPI) at the time you sold your property by the CPI at the time you bought the property. As a result, your initial purchase price is likely to be increased, and your capital gain reduced. Capital gains tax exemptions There are certain circumstances in which CGT can be exempt. CGT exemptions include 50 per cent discount, principal place of residence, six year rule and six month rule. 50 per cent rule: As previously mentioned, property investor who have owned an investment property for more than 12 months are entitled to a 50 per cent discount on CGT. Primary place of residence: This refers to when a person resides, occupies and lives in a property as their home. If a property is considered an owner’s primary place of residence, they are entitled to a full CGT exemption. Six year rule: If a property owner moves out of a primary place of residence and rents it out, they can claim an exemption from CGT for a period of up to six years. If a property owner moves back into the property and afterwards moves out again then a new six year period commences from the time they last moved out. Six month rule: There are exemptions from CGT if a property owner considers more than one property to be a primary place of residence within a six month period. The property owner must meet one of the below conditions: The old property was the owner’s primary residence for a period of at least three months in the twelve months before they sold it An owner did not use the property to provide assessable income in any part of the twelve months prior to selling Depreciation and capital gains tax Capital gain is your profit minus your cost base. Depreciation impacts your cost base and therefore affects CGT. Depreciation deductions can be claimed under two categories – plant and equipment deductions and capital works depreciation. Both can affect your cost base in different ways. To find out more, read Does Depreciation Affect Capital Gains Tax?

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