» investment property tax deductions

Moving into an investment property

BMT team — Tue, 26 Nov 2019 22:09:12 +0000

There are certain scenarios where an investor can end up living in an investment property. It’s important to be wary of the rules and regulations before doing so. How a property is defined for tax purposes will affect the deductions you can claim. Renting out part of a primary place of residence Living in your investment property while renovating Does living in your investment property affect capital gains tax? If you decide to move into an investment property and it becomes your primary place of residence (PPOR), meaning the place where you predominantly reside, you’ll need to declare this for tax purposes. You’ll no longer be eligible to claim tax deductions for property expenses like the interest on a home loan, council rates, land taxes and repairs and maintenance. It will also eliminate any property depreciation deductions you were previously entitled to claim. Renting out part of a primary place of residence A primary place of residence doesn’t offer tax benefits, but what happens if you rent out a portion of the property you live in? If you lease part of your property, the rent received is regarded as assessable income. As the property is income-producing, you’re entitled to claim a percentage of the property expenses as well as any eligible property depreciation. The percentage you can claim is based on how much of the property is being leased. For example, if you lease out a single bedroom, you can only claim expenses related to that portion of the house. A tax depreciation schedule will outline the depreciation deductions available and an accountant will calculate the final percentage you’re able to claim based on the portion of the home producing income. If you decide to rent out the whole property after living in it, you won’t be able to claim for any existing plant and equipment assets as they will be deemed second-hand under current legislation. You will still be eligible to claim capital works deductions and any new assets you install once the property is being utilised as a rental property. Living in your investment property while renovating As mentioned above, living in an investment property can affect the depreciation deductions you can claim. Legislation introduced in 2017 states that investors are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. If you live in a rental property while renovating, any newly installed assets will be classed as previously used. Unless there is good reason, you should install new plant and equipment assets after you’ve move out of the property and it has been listed for rent. This will ensure you’re eligible to claim the maximum depreciation deductions available. It’s important to note the 2017 legislation does not affect buyers of brand-new property, residential properties considered to be substantially renovated or commercial properties. With this in mind, brand-new property generally holds the most lucrative value for investors from a tax perspective. Capital works deductions for structural assets such as new walls, kitchen cupboards, toilets and roof tiles are also unaffected by the legislation changes and can still be claimed by owners of income-producing properties. These deductions typically make up 85-90 per cent of a total depreciation claim. Does living in your investment property affect capital gains tax? A capital gains tax (CGT) event occurs when an asset, including property, is sold. The timing of this is important as it determines the income year the tax will be applied. There are certain circumstances in which CGT can be exempt. Some of the CGT exemptions relate to living in your investment property. For example, if a property is considered your primary place of residence, you’re entitled to a full CGT exemption. If you move out of a primary place of residence and rent it out, you’re exempt from CGT for a period of up to six years. If you move back into the property and afterwards move out again then a new six year period commences from the time you last moved out. There are also exemptions from CGT if you consider more than one property to be a primary place of residence within a six month period. To be eligible, you must meet one of the below conditions: The old property was your primary residence for a continuous period of at least three months in the twelve months before they sold it You did not use the property to provide assessable income in any part of the twelve months prior to selling. To find out more about CGT, read When do you pay capital gains tax on investment property?

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13 of the most commonly missed tax deductions

BMT team — Mon, 14 Oct 2019 22:06:01 +0000

Many property investors self-assess their tax deductions. However, few have the knowledge and information to accurately prepare their own tax return. As a result, there are several commonly missed tax deductions. The ATO recently reviewed individual tax returns to determine the difference between what should have been paid and what was paid. They found that nine out of 10 individuals with a rental property were making mistakes. These mistakes could result in an under or over claim. The top three most commonly missed tax deductions were loan interest, borrowing expenses and repairs and improvements. The following are 13 deductions that have the biggest impact on your claim. In this article we will inspect: Loan interest Borrowing expenses Repairs, maintenance and capital improvements Property depreciation Property management fees Real estate advertising costs Proving the property was genuinely available for rent Land tax and council rates Pest control Legal expenses Insurance Apportioning expenses and income for co-owned properties Incorrectly claiming when selling your investment property What can you do if you’ve missed tax deductions? Avoid missing tax deductions in future Loan interest If you require a home loan to purchase your investment property, you’re entitled to claim the interest as a deduction. Along with this, you can also claim interest on a loan used to purchase a depreciating asset for the rental property (like a new air conditioner), to make repairs or to finance renovations. You can only claim the part of the interest that relates to the rental property. Borrowing expenses When you first purchase your investment property the borrowing expenses involved can be claimed as a tax deduction. These expenses can include loan establishment fees, title search fees and costs of preparing and filing mortgage documents. As outlined by the ATO, if your total borrowing expenses are more than $100, the deduction is spread over five years. If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred. Repairs, maintenance and capital improvements According to the ATO, repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. Maintenance, on the other hand, is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion. Any costs incurred to repair or maintain your investment property can be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are capital in nature and claimed over time. A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation. Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings. Property depreciation The ATO allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. As mentioned above, depreciation can be claimed under two categories – capital works and plant and equipment assets. Depreciation claims help investors to reduce their tax liability and therefore pay less tax. The best way to ensure you maximise your depreciation claim is to organise a tax depreciation schedule. Property management fees If you enlist a real estate to manage your investment property, you’ll be required to pay property management fees. These fees are tax deductible and can be claimed in your annual tax return. Real estate advertising costs As an investor, you’re eligible to claim any rental advertising fees charged in the same year you paid for them. Proving the property was genuinely available for rent You can claim pro-rata depreciation deductions for the period your property is rented out or is genuinely available for rent. That is, the property is given broad exposure to potential tenants and considering all the circumstances tenants are reasonably likely to rent the property. Land tax and council rates You’re entitled to claim deductions for costs like land tax, body corporate fees and council rates relating to your investment property. Pest control Rental property owners can claim pest control costs on tax. Depending on the cost of the pest control, you can generally claim these expenses as an immediate deduction. Legal expenses The ATO stipulates that legal expenses involved in purchasing or selling your property, resisting land resumption or defending your title to the property are not tax deductible as they are capital in nature. An investor is entitled to claim any expenses involved in evicting a non-paying tenant, taking court action for loss of rental income or defending damages claims for injuries suffered by a third party on your rental property. Insurance If you claim rental income on your property, your insurance also becomes tax deductible. Insurances that may be tax deductible include building, contents, landlord, public liability or private mortgage insurance. Apportioning expenses and income for co-owned properties Co-ownership opens doors for investors by increasing buying power and reducing ongoing expenses like rates, repairs and maintenance. A depreciation schedule for a co-owned property provides deductions based on the percentage of ownership of each party. Splitting deductions by ownership can improve your eligibility for immediate write-off and low-value pooling. The ATO allows property investors to claim an immediate write-off for assets with an opening value of less than $300. Where ownership is split, an accountant can apply this rule and claim an immediate write-off for items where […]

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Are you claiming all available tax deductions from your investment property?

BMT team — Mon, 13 May 2019 04:27:39 +0000

Are you claiming all you’re entitled to at tax time? Find out what tax deductions you can claim on an investment property and maximise your deductions this June 30. All owners of income-producing properties are entitled to claim deductions for the period a property is rented or available for rent. Here are the tax deductions you can claim: Rates and management fees Repairs and maintenance Property depreciation Ensure you claim your entitlements Be aware of CGT Rates and management fees Investors can claim immediate deductions for expenses involved in the management of their investment property, including: property management fees body corporate fees and charges accounting fees council rates land tax advertising for tenants insurances including public liability, building, contents and landlord Repairs and maintenance Repairs refers to work completed to fix any damage to an investment property, while maintenance is work completed to prevent deterioration. Repairs and maintenance can be claimed as an immediate deduction with your Accountant by providing relevant receipts. If you complete any renovations or repairs where you improve the value of the asset beyond its original state at the time of purchase, these items will need to be depreciated as either capital works or plant and equipment depreciation. To learn more, read our Maverick article regarding repairs and maintenance and capital improvements. Property depreciation Property depreciation is generally the second biggest tax deduction after interest, though it’s often missed by investors. Depreciation is considered a non-cash deduction, meaning an investor doesn’t need to spend any money to be eligible to make a claim. It sounds too good to be true, but property depreciation can make a big difference to an investor’s cash flow. Depreciation has two categories: Capital works deduction Capital works deductions (or Division 43) refers to the tax deductions for the building’s structure and items considered to be permanently fixed to the property such as kitchen cupboards, doors and sinks. As a rule, residential homes in which construction commenced after 15th September 1987 and commercial properties in which construction commenced after 20th July 1982 are eligible for the capital works deductions. Though deductions for commercial properties will vary based on the type, age and historical construction cost of the property. Plant and equipment assets Plant and equipment assets are identified as items which are easily removable from the property. These items have a limited effective life as set by the tax commissioner and can generally be depreciated over time. Examples include carpet, hot water systems and blinds. It’s important to be aware of restrictions to claiming depreciation on previously used plant and equipment found in second-hand residential properties. Read our BMT Insider article on plant and equipment deductions and legislation for more. Any income-producing property may be eligible for thousands of dollars in depreciation deductions. It’s important to get a tax depreciation schedule to ensure you claim the biggest tax refund possible. Tax Ruling 97/25 states Quantity Surveyors such as BMT Tax Depreciation are one of the only professions qualified to estimate construction costs for depreciation. Ensure you claim your entitlements A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property to ensure you maximise your cash flow. During FY 2017/18, we found residential property investors an average first year deduction of almost $9,000. Our depreciation schedules last for the forty-year life of an investment property and can be claimed in your tax return. Be aware of CGT It’s also important to be aware of the Capital Gains Tax (CGT) implications of owning an investment property should you decide to sell the property or if you are removing and scrapping any of the plant and equipment assets contained. There are a few CGT exemptions which may apply to investment properties. To learn more, click here. By choosing a BMT Tax Depreciation Schedule, you can be assured you are choosing a report which covers you for all scenarios, including providing a capital loss depreciation schedule when required. We also recommend speaking with your Accountant for advice regarding CGT.

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Can you claim tax deductions when renovating an investment property?

BMT team — Sun, 16 Dec 2018 23:31:03 +0000

Investors who are considering buying a second-hand property often ask whether they can claim tax deductions for renovations that have been completed by a previous owner. The rules have always been complex for investors to understand and for this reason it’s best to consult with a specialist Quantity Surveyor for expert advice on the property being considered. Given the changes to depreciation legislation relating to plant and equipment found in second-hand properties passed by the federal government in November 2017, it’s now more important than ever to obtain a comprehensive depreciation schedule. In this article, we will cover: Claiming deductions for structural work Claiming deductions for previously-used assets Example scenario Claiming tax deductions for structural work The Australian Taxation Office (ATO) allows investors to claim capital works deductions in any residential building where construction commenced after the 15th of September 1987. Capital works deductions make up 85-90 per cent of a total depreciation claim. This applies to the structural items of the building and any fixed items, such as the walls, doors, windows, kitchen cupboards, retaining walls, toilets, sinks and the roof. For a residential property, investors can claim capital works deductions at a rate of 2.5 per cent per year for a maximum of forty years from the property’s completion date. Many investors think that due to these date restrictions, if a property pre-dates 1987 they won’t be eligible to claim capital works deductions. However, this is often not the case, as many investment properties built prior to 1987 have undergone some form of renovation. The ATO allows property investors to claim capital works deductions for structures added by a previous owner so long as the work is completed within the qualifying dates. The good news for investors is that the Federal Government has not changed the way capital works deductions are applied within the legislation changes. Investors can continue to claim depreciation capital works improvements made by prior owners as before. Claiming deductions for plant and equipment assets installed by previous owners Previously, under existing legislation investors could claim plant and equipment items (which are the easily removable assets for example ovens, range hoods, smoke alarms, carpets and exhaust fans) in any residential property no matter how old the building. However, under the Federal Government’s new legislation any investor who exchanges contracts on a second-hand property after 7:30pm on the 9th of May 2017 can no longer claim tax deductions on previously used plant and equipment assets installed by a previous owner. Investors can only claim depreciation on those items they purchase and add to the property themselves. It’s important to be aware that owners of newly built properties can still continue to claim plant and equipment depreciation deductions as normal. For those who exchanged contracts prior to 7:30pm on the 9th of May 2017, the legislation was grandfathered. This means these investors can continue to claim depreciation for work completed by previous owners under the pre-existing legislation. Example scenario – tax deductions for renovations completed by a previous owner The following table provides examples of some of the tax deductions an investor could claim for renovations completed to an investment property by a previous owner. In the above scenario, the investor exchanged contracts and settled on the property prior to 7:30pm on the 9th of May 2017. Therefore, they are still eligible to claim depreciation for plant and equipment additions that were made by the previous owner. They are also eligible to claim capital works deductions for structural work completed. However, if the renovations was completed in a property where the investor exchanged contracts after 7:30pm on the 9th of May 2017, the deductions would be reduced to only include the structural work completed including fixed items (such as the retaining wall, the outdoor deck, kitchen cupboards and toilet). The table below demonstrates the difference in deductions for an investor who exchanges contracts after 7:30pm on the 9th of May 2017 based on the new legislation. If an investor purchases new plant and equipment assets themselves and has these installed in a property, the depreciation for these assets can be claimed using the existing depreciation methods, no matter how old the property is or when they exchanged contracts. Learn more about scrapping here. A specialist Quantity Surveyor can ensure that an investor claims the correct depreciation deductions based on their individual scenario, including any work completed during renovations. By contacting an expert and arranging a comprehensive tax depreciation schedule, this can help an investor to ensure the deductions they claim are correct and in line with the latest policy enforced by the ATO.

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PAYG withholding variation – how to make the most of property tax deductions

BMT team — Wed, 05 Dec 2018 03:27:54 +0000

Property investors often rely on tax breaks to help them afford their property. Waiting until the end of the financial year to receive your tax return can cause cash flow problems, particularly when unexpected repairs and maintenance crop up. But the good news is you don’t have to wait until the end of the financial year to receive your claim. Deductions for expenses related to owning an investment property, such as interest, rates, repairs and maintenance, property management fees, capital works and plant and equipment depreciation can be received on a more regular basis throughout the year simply by choosing to use a Pay As You Go (PAYG) withholding variation. A PAYG withholding variation allows you to take advantage of deductions regularly, rather than in one lump sum at the end of a financial year. It allows your employer to vary the amount of tax withheld to anticipate tax liabilities and as a result you can adjust what you receive in your fortnightly income. Contents: A simple four-step process for setting up PAYG withholding variation How will depreciation deductions make a difference? Speak with a depreciation expert A simple four-step process for setting up PAYG withholding variation Contact an Accountant to make sure that this is suitable for your circumstances. An Accountant will usually organise a PAYG withholding variation by submitting estimated financial information to the Australian Taxation Office (ATO) To support your PAYG withholding variation, contact a specialist Quantity Surveyor to order a tax depreciation schedule. This schedule will outline all current and future depreciation deductions for an investment property. The higher the depreciation deductions are, the less tax you will need to be taken out of your pay. Once a request has been approved by the ATO, your employer will reduce the amount of tax withheld, increasing your take-home pay. Remember, a PAYG withholding variation doesn’t replace your normal tax return. You will still need to visit an Accountant at the end of the year to calculate the actual amount of tax liability. How will depreciation deductions make a difference? The following case study compares a PAYG claim with and without depreciation. In the case study, the investor owns a brand-new house purchased for $532,000 which is rented for $600 per week, an income of $31,200 per annum. They also have expenses for interest, rates, repairs and maintenance, property management fees and insurance totalling $41,400. Where depreciation isn’t claimed, the investor receives an additional $145 per fortnight in their pay by applying the PAYG withholding variation. But with a depreciation claim of $13,345, the investor receives $335, or an additional $190 in their fortnightly pay. As can be seen here, a PAYG withholding variation will provide added flexibility for a property investor. Having access to the extra money during the year makes it easier to manage cash flow, especially when there can be surprise costs such as urgent repairs or maintenance. The additional income also gives the owner the option to invest the extra money or reduce loan liabilities. Speak with a depreciation expert A PAYG withholding variation makes a difference to a property investor’s regular cash flow. A specialist Quantity Surveyor can add to this by providing a tax depreciation schedule before you submit a PAYG variation request. Quantity Surveyors are one of the few professionals qualified under the Tax Ruling 97/25 to estimate construction costs for property depreciation purposes. For obligation free advice about an investment property situation contact the expert team at BMT Tax Depreciation on 1300 728 726 or visit www.bmtqs.com.au.

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Investment property tax deductions revealed

BMT team — Fri, 23 Nov 2018 06:07:29 +0000

Investment property tax deductions are one of the most misunderstood areas when it comes to owning a residential investment property. Investors are often unaware of the deductions they are entitled to claim and miss out on lucrative tax deductions. Deductions can be claimed on related expenses for the period a property is rented or available for rent, for example, advertised for rent. The two main deduction categories are: Management and maintenance costs Borrowing expenses, depreciation and capital works Property management and maintenance Investors can claim immediate deductions for expenses involved in the maintenance and management of their investment property. This includes things such as: Property management fees Body corporate fees and charges Repairs and maintenance Accounting/tax agent fees Council rates Land tax Advertising for tenants Gardening, cleaning and pest control Insurance including public liability, building and contents Interest Repairs and maintenance Owners of investment properties can claim deductions for any repairs and maintenance they carry out on their property. A repair involves the replacement or renewal of a broken or worn out part such as guttering, broken windows and electrical appliances. An expense is considered maintenance if it is carried out to prevent or fix deterioration. This includes painting, plumbing maintenance and pest control. Repairs and maintenance should not be confused with renovations/improvements. Renovations/improvements are classified as capital improvements under the capital works depreciation category and cannot be claimed fully in the year the expense is incurred. Rather, they can be claimed at 2.5 per cent for forty years from the construction completion date. Examples of renovations/improvements include adding or removing an internal wall, adding a new kitchen, bathroom, carport or fence. Interest on a loan Investors can claim the interest on the loan used to purchase their property as a tax deduction. Other borrowing expenses that fall under allowable investment property tax deductions include loan establishment fees, mortgage broker fees, ongoing loan fees, lenders mortgage insurance (LMI) and the cost of preparing mortgage documents. Depreciation One of the most important tax deductions for investors is depreciation. Owners of income producing properties are entitled to claim the wear and tear on their properties and contained assets as a depreciation deduction. If an investment property was purchased prior to 7:30pm on the 9th of May 2017, the owner can claim depreciation for any plant and equipment assets within the property as well as any available capital works deductions. Plant and equipment assets are the easily removable and mechanical items considered not fixed to the building and include items such as hot water systems, air conditioning units and curtains. If a property was purchased after 7:30pm on the 9th of May 2017, plant and equipment depreciation can only be claimed if the property is brand new or is considered to be substantially renovated. Owners of second-hand residential properties purchased after this date can only claim depreciation on plant and equipment assets they purchase directly for the property. Investors can claim capital works deductions for the depreciation that occurs to the structure of their property. This applies to any residential building where construction commenced after the 15th of September 1987. Investors are entitled to claim capital works at a rate of 2.5 per cent for up to forty years. Owners of older buildings built before 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner. Investors should engage a specialist Quantity Surveyor, such as BMT Tax Depreciation, to prepare a tax depreciation schedule to maximise their depreciation claim. A schedule lasts for the lifetime of the property (40 years) and is the best way to ensure every claimable dollar is captured. In the 2017-2018 financial year, BMT found their residential investor clients an average of $8,893 in the first full financial year alone. Request an obligation-free quote from BMT here. For more information on investment property tax deductions, visit the Australian Taxation Office website.

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