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Understand how Investment property renovations increase tax deductions, rent and property value

BMT team — Mon, 17 Oct 2022 06:06:34 +0000

BMT Tax Depreciation are often asked what investors can do to increase tax deductions and boost cash flow. One way is to renovate! Investment property renovations increase tax deductions, help with increasing a property’s value and improve rental yield leading to greater returns. This article outlines the different types of investment property renovations, what to look out for and how to maximise tax deductions. Depreciation explained Greater returns Repairs, maintenance and capital improvements Previously used plant and equipment can’t be claimed Scrapping Renovations completed by a previous owner Cosmetic versus substantial renovations Maximise the tax benefits with depreciation Depreciation explained Depreciation is the natural wear and tear of a property and the assets within it over time. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim this as a tax deduction. There are two types of deductions available to claim. Capital works deductions (Division 43) is a claim available for the building’s structure and the assets that are permanently fixed to the property. And plant and equipment depreciation (Division 40) is a claim on the assets that are easily removable from the property or mechanical in nature. Capital works deductions are a fixed amount that can be claimed each year on all applicable building structures for up to forty years. Plant and equipment items have varying effective lives and therefore can be depreciated at an increased rate which varies depending on the asset and the method used to calculate the claim. Greater returns Renovating an investment property will not only heighten depreciation deductions but can also increase the capital growth and rental return. Even updating the flooring, adding a fresh coat of paint and updating areas like the kitchen or bathroom can attract better quality tenants and increase rental return. The case study below demonstrates a scenario where an investor completed a $65,000 renovation. Here is the investor’s scenario before and after completing the renovation • Original purchase price (before renovation) = $610,000 • Rental income per annum prior to renovation = $20,580 • Total renovation spend (completed in 2021) = $65,000 • Property value on completion = $785,000 • Rental income per annum after renovation = $27,040 Due to the renovations completed the property’s value increased by $175,000 and yielded an additional $6,460 per annum in rental income to. Repairs, maintenance and capital improvements Knowing the difference between repairs, maintenance and capital improvements is particularly important when renovating. According to the Australian Taxation Office (ATO), repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence. This occurs when an asset is already damaged or deteriorated and therefore requires repairing. 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. The total cost 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 does not always qualify for repairs and maintenance and therefore not always 100 per cent is claimable in the first year. Instead, these costs are treated as capital improvements and depreciated as capital works deductions or depreciation of plant and equipment. A capital improvement is considered any works that improve a property beyond its original state. According to TR 97/23, an ‘improvement’ provides a greater efficiency of function in the property – usually in some existing function. Some indicators that the work performed is an improvement include whether the work will: • extend the property’s income-producing ability • significantly enhance its saleability or market value, or • extend the property’s expected life For investors who already possess a BMT depreciation schedule and would like to update minor upgrades they can do this via email, the MyBMT portal or a phone call. Previously used plant and equipment can’t be claimed Residential property investors completing renovations should be aware of the 2017 legislation changes. The legislation stipulates that investors who purchased property after 7.30pm on 9 May 2017 are unable to claim deductions for the decline in value of previously used plant and equipment found in second-hand residential properties. But these investors can still claim depreciation on new plant and equipment assets added to a property and all structures new and old as capital works deductions. It’s common for investors to live in their property while renovating. While this may seem like a good idea, all plant and equipment assets like air-conditioning units, light fittings and hot water systems will be classified as previously used and no longer be eligible for depreciation deductions due to the legislation changes. Scrapping Assets may be removed while there is remaining depreciable value left over, claiming this un-deducted value is commonly referred to as ‘scrapping’. Scrapping value is essentially the un-claimed or un-deducted depreciable value of an asset at the time of removal. The scrapping value is calculated as follows: Scrapping value = original depreciable value – deducted value to date For example, if the original value of an asset or part of a building was $8,000, and $6,000 was claimed by the time of the asset’s disposal, the ‘scrapping value’ or part of a building would be $2,000 (assuming no amount is received on disposal). The owner could then claim the $2,000 as an instant tax deduction in the same financial year as removal. It’s important to talk to a quantity surveyor before removing any items so they can capture the assets available for capital works or plant and equipment depreciation deductions. Renovations completed by a previous owner Many older properties have had renovations completed by previous owners, these works are often qualifying and can be claimed by current owners. For instance, if a property was built in 1979 but renovations were completed in 1993 the capital works for the renovation […]

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Can I claim tax deductions while building an investment property?

BMT team — Tue, 30 Nov 2021 22:10:13 +0000

Building an investment property from scratch allows you to build the property best matched to your investment goals. But can you claim tax deductions while its under construction? The short answer is – ‘it’s complicated’. But the way in which you build it can make a big difference to tax deductions down the track. Benefits of building an investment property Building an investment property requires time, patience and most of all the funds. But doing the hard work now can pay dividends in the future. There are some key benefits of building your own investment property. 1. Tenant appeal: While it’s your house, your future tenants will make it their home. A newer property will give them a fresh slate and make them more inclined to stay long term. 2. Rent return: A newer property will demand a higher rental rate compared to a similar, older property in the same area. 3. Energy efficiency: Older housing stock, especially those that were built before energy efficiency measures were in place, produce a huge amount of emissions. Newer properties are proven to be more environmentally friendly. 4. Depreciation deductions: New properties and high depreciation deductions go hand-in-hand – but more on this later. Tax deductions while building an investment property The Australian Taxation Office (ATO) is very clear about tax deductions while building an investment property. Once a ‘substantial and permanent structure’ is built on vacant land, tax deductions still cannot be claimed until it can legally be occupied and is genuinely available for rent. Case study Ashton owns a residential block of land and he is planning on building an investment property on it. He has engaged an architect for the building, poured the concrete slab for the house and has fenced the land’s perimeter but it doesn’t hold any substantial or permanent structures. He purchased the land outright and is yet to obtain a loan for the construction of the building. Since the property is also residential, deductions won’t be available until it is lawfully able to be occupied and rented or available for rent. There are some instances where an expense can be claimed during construction as it is directly related to the intent of renting, such as interest on loans or landlord insurance . However most expenses that are made during the construction of a property will most likely will form part of the property’s cost base, construction cost or will not be claimable. Therefore, we recommend discussing this with an accountant for the most accurate advice. It’s still important to keep tax deductions in mind when building a future investment property. The choices you make during the build will make a significant difference to the future depreciation deductions you can claim. Why should depreciation be considered when building an investment? Depreciation is the natural wear and tear of a property and its assets over time. Property investors can claim the depreciation of their rental properties as a tax deduction each financial year. It’s well-known that new properties often produce significantly higher deductions than their older, second-hand counterparts. This is due to two key factors. Firstly, 2017 legislation changes impact what plant and equipment assets can be claimed as depreciation from a property. Under the changes, pre-existing plant and equipment assets from a second-hand property purchased after 9 May 2017 are ineligible for depreciation. Obviously, newly built properties aren’t impacted by these if you don’t live in the property before renting it out. The second factor is around capital works deductions. These deductions are available on a property’s structure and fixed assets like door handles and benchtops. Any residential property constructed after 15 September 1987 will have capital works deductions available. Order an estimate while you’re waiting on the build If you have most of the details of the property now but are still waiting for it to be built, you can still get a good idea of the depreciation deductions you can claim. BMT Tax Depreciation provide obligation-free depreciation estimates for any type of property in any stage of construction if the baseline details are available. Contact BMT today on 1300 728 726 or Request a Quote.

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Business tax deductions to boost cash every financial year

BMT team — Mon, 28 Jun 2021 07:01:32 +0000

The end of financial year serves as a good reminder for claiming tax deductions. Knowing what is and isn’t available as a deduction will set business owners up for success in the new financial year. While some deductions for businesses are similar to property investors, others are quite unique. In this article, we will cover the following business tax deductions: Repairs and maintenance Motor vehicle expenses Business travel Employee wages and super contributions Other operating expenses Depreciation deductions What makes something a business tax deduction? There are many tax deductions out there, but not everything will be eligible. The Australian Taxation Office (ATO) applies three golden rules when determining business tax deduction eligibility. The tax-deductible expense must be for business use, not private. If the expense is partially used for private use, the owner can only claim the portion used for business purposes. The business owner must have records to substantiate the deduction. Key business tax deductions Hundreds of tax deductions are out there to be claimed. Deductions can change depending on the type of business and how it’s set up. Here are six key categories that are applicable for most businesses. 1. Repairs and maintenance The ‘repairs and maintenance’ umbrella is large. It covers expenses associated with the upkeep of the assets needed for business operations. Examples could be painting, maintaining plumbing, replacing damaged parts of assets like broken glass and repairing machinery. Further rules apply to claiming repairs for machinery, tools and property. If the repair is made immediately after acquisition, it can’t be claimed. The ATO’s rationale for this ruling is that the need for the repair is a result of the item’s condition when it was purchased, not the business’s operations. 2. Motor vehicle expenses Motor expenses include fuel, repairs and services, the interest on a motor vehicle loan, insurances and registration. Business owners can also claim the depreciation on a vehicle’s value – but more on this later. 3. Business travel These are the travel expenses outside those spent exclusively on operating a business vehicle. Examples are airfares, public transport expenses, car hire fees and overnight business accommodation. Meals for overnight travel also fall under this category. 4. Employee wages and super contributions Employee wages and salaries are a type of operating expense; therefore they are tax deductible. How they are claimed depends on whether the business is a partnership, trust or company. But generally, to claim them a prerequisite is to comply with pay-as-you-go withholding and reporting obligations for all employee payments. Businesses can also claim a tax deduction on the super contributions they make for their employees. To be eligible, the contributions must be made on time and into a complying super fund or retirement savings account. 5. Other operating expenses The list of other general business operating expenses is endless – these are the everyday expenses related to running a business. Just some examples include utilities, advertising, sponsorships, stationary, insurance premiums, waste removal, legal expenses and the cost of running a commercial website. 6. Depreciation deductions Last but not least is depreciation. Depreciation is the natural wear and tear of property and assets over time. Business owners can claim depreciation as a tax deduction on most assets they own and use for their business, including tools, vehicles, furniture and property. A business’s easily removable and mechanical assets are classified as ‘plant and equipment’ for depreciation purposes. Usually, the yearly depreciation claim is based off the asset’s effective life. However, a policy called temporary full expensing is currently in place until the end of the 2022/23 financial year. This allows businesses to instantly deduct any eligible plant and equipment asset purchased after 7.30pm on 6 October 2020 and before 30 June 2023. Find out more about temporary full expensing here. BMT Tax Depreciation has been working with Australian businesses for over twenty years, helping them achieve the maximum depreciation deductions possible. To learn more about BMT’s commercial services, contact the team on 1300 728 726 or Request a Quote.

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How does owning an investment property affect your taxes?

BMT team — Tue, 24 Nov 2020 22:43:39 +0000

Does owning an investment property affect your taxes? It certainly does. The income generated from the property is included in your taxable income on top of other income sources, such as your salary. But owning an investment property doesn’t necessarily mean paying more tax. In fact, it can also lead to you paying less tax while building capital. In this article we will explore: Rental property income Rental property expenses Property depreciation – the deduction without an expense What gearing is best for you? Rental property income The rental income you receive from your investment property is included in your annual taxable income. Given that property is usually a stable, long-term investment, it’s easy to estimate the income stream it provides. Residential leases often run for 6 to 12 months and the national vacancy rate is currently stable at 2.1 per cent. This means on average, properties only sit vacant for one week a year. Rental property expenses Claiming expenses goes hand-in-hand with reporting the income you receive. Most costs associated with owning and operating the rental property can be claimed in the financial year the expense was made. Some of the top rental property expenses include interest repayments, depreciation, insurances, council rates and charges, property management fees and more. The only types of expense you can’t claim are capital expenses. These are the foundational costs of owning the investment property such as the cost of land, building and pest inspections prior to the exchange of contract and stamp duty. These are assessed when calculating the cost base to work out capital gains tax (CGT) when the property is sold. Sometimes the rental property expenses can be more than your income, especially in the earlier years of ownership. When this occurs, it means your property is ‘negatively geared’ as it’s making an overall loss. The loss from your investment property can be used to reduce other assessable taxable income like your salary, meaning you pay less tax. Property depreciation – the deduction without an expense Property depreciation is one of the most beneficial deductions you can take advantage of. It’s the second-highest deduction available to property investors, after costly interest repayments. Not only can you claim it for up to forty years, but an added bonus is that you don’t need spend any money to claim it. This is because depreciation is the natural wear and tear of a property and its assets over time. This depreciation is treated like other expenses and is deducted from your taxable income each year. What gearing is best for you? There is no ‘right’ answer to this question. It depends on your own investment strategy. Most Australians have debt associated to their property and are therefore running at a loss. This allows them to take advantage of negative gearing. Property investors sometimes intentionally negatively gear their property. They do this to reduce their taxable income as their property grows in value. While self-funded retirees may have a different strategy, aiming for positively geared property, as their investments are their main source of income. Having a trusted investment property team around you will help you establish a solid strategy, making your rental property income work for you. For over twenty years, BMT Tax Depreciation has helped over 700,000 investors claim property depreciation and boost their cash flows. To learn more about depreciation and the services that BMT offers, Request a Quote or call 1300 728 726. Related topics: Is stamp duty tax deductible? Are refinance costs tax deductible on a rental property? Top rental property tax deductions How does investment property depreciation work?

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What are sundry rental expenses?

BMT team — Tue, 03 Nov 2020 22:01:41 +0000

Successful property investors claim every deduction they are entitled to. From large deductions like property depreciation and interest repayments, to the smaller ones such as stationary costs and sundry expenses. Rental property expenses can stack up quickly. Claiming these correctly can often make or break your success as a property investor. Contents What is a sundry rental expense? Do investors take advantage of sundry rental expenses? What happens when a sundry expense becomes more frequent? Tracking sundry rental expenses is easy with MyBMT Claim the most with a tax depreciation schedule Key points A sundry expense is rare in nature and of low cost. They may be small, but latest statistics revealed investors claimed over $1.6 million in sundry expenses during FY 2017-18. An expense can be taken out of the sundry category if it becomes more frequent and expensive. What is a sundry rental expense? A sundry rental expense can be various things, from interest on loans used to buy depreciating assets, bookkeeping fees and bank charges. In the accounting landscape, sundry rental expenses are defined as ‘rare’ and in small amounts. This means a large, frequent expense such as mortgage interest repayments can’t be recorded as a sundry expense. There are a wide range of sundry expenses available for you to claim. The exact types or categories can change based on your circumstances. Do investors take advantage of sundry rental expenses? While sundry rental expenses can be made up of several smaller costs, the numbers prove that investors still take advantage of them. The latest statistics released by the Australian Taxation Office (ATO) from FY 2017-18 revealed that sundry rental expenses made up over $1.6 million of claims made by Australian investors. What happens when a sundry expense becomes more frequent? Everyone’s investment property journey is different, and sometimes an expense that was originally classed as sundry may eventually need to be reported as its own category. In practice: sundry to regular expense Henry and Val own a block of fifteen residential apartments and rent each out. The apartment block is located in a popular coastal holiday destination. Henry and Val hire security to monitor the outside of the building on known busy nights such as New Year’s Eve and national public holidays. As this is only a few nights of the year they can claim the security cost as a sundry expense. After the first year of this arrangement, they decided to make the outside security monitoring more regular to include school holiday periods and all public holidays. As the expense becomes higher and more frequent, Henry and Val aren’t able to claim it as a sundry expense. Instead, the security cost will become its own category in their tax return. Tracking sundry rental expenses is easy with MyBMT Knowing what you can claim is just one step to making the most out of your investment property. Tracking and lodging these expenses correctly is just as important. The income and expenses tool on the free MyBMT portal helps you do this easily and will save you time. The tool tracks expenses with just a click of the button so there’s no need to keep piles of paperwork and receipts in your desk drawer. MyBMT’s income and expenses tool is also designed to easily integrate with the ATO’s MyTax portal and any accounting software. Claim the most with a tax depreciation schedule A tax depreciation schedule fee is a one-off, 100% tax deductible sundry expense. BMT is the leading specialist and provides the most comprehensive tax depreciation schedules on the market. BMT guarantees to find double their fee in the first full financial year claim or there will be no charge for their service, so you always know the schedule is worthwhile. To learn more about BMT and the BMT Tax Depreciation Schedule, Request a Quote or call BMT on 1300 728 726.

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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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Capital works deductions explained

BMT team — Tue, 09 Jul 2019 06:00:42 +0000

Making sense of tax depreciation lingo can sometimes be confusing but as an investor, it’s important that you have a good understanding of the depreciation deductions you can claim to ensure you’re getting the most out of your investment property. As outlined by the Australian Taxation Office there are two categories that make up depreciation deductions, division 43 capital works deductions and division 40 plant and equipment depreciation. What are capital works deductions? Capital works deductions are income tax deductions an investor can claim for the wear and tear that occurs to the structure of the property and items considered to be permanently fixed to the property. This includes any structural improvements that may have been made by a previous owner during a renovation within the relevant dates. In a residential property, capital works deductions cover the following items: Bricks, mortar, walls, flooring and wiring Built-in kitchen cupboards Clothes lines Doors and door furniture (handles, locks etc.) Driveways Fences and retaining walls Sinks, basins, baths and toilet bowls Some common items in commercial properties that can be claimed as capital works deductions include: Bricks, mortar, walls, flooring, roofing and wiring Sinks, tiles, basins and toilet bowls Mezzanines Ducting for air conditioning Particular assets can cause confusion because some parts will qualify for plant and equipment depreciation while other parts qualify for capital works deductions. An example of this is an air conditioning unit, where the unit itself depreciates under division 40 whilst the ducting for the same unit falls under division 43. Similarly, an in-ground pool falls under the division 43 whilst the pumps and filtration equipment for the pool are division 40, depreciating plant and equipment assets. As a general rule, any residential building where construction commenced after the 15th of September 1987 will entitle their owner to capital works deductions at a rate of 2.5 per cent per year for up to forty years. In a commercial building, capital works deductions generally apply to buildings where constructed commenced after the 20th of July 1982. If your property was constructed prior to these dates, it is still important to get in touch with a qualified quantity surveyor, such as BMT, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner. To order a BMT Tax Depreciation Schedule to ensure you are maximising your depreciation deductions on your investment property, you can Request a Quote online or call us on 1300 728 726.

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What should you know about negative gearing before the 2019 Federal Election?

BMT team — Tue, 14 May 2019 02:54:42 +0000

With the 2019 Federal Election fast approaching, negative gearing has become a key campaign issue as each of the major parties offer significantly different policies should they win the election. Here we’ve outlined each major party’s election policies regarding negative gearing and the associated tax concessions. We’ve also taken a deeper look at what’s driving the debate, some key data to be aware of, what’s happening currently in the property market and the potential impact the changes could have on investors. In this article we will explore: What changes do the major parties propose? The impact of proposed ALP negative gearing and CGT changes Key facts to be aware of behind the negative gearing policy debate What changes do the major parties propose? The Australian Labor Party (ALP) have announced they plan to restrict negative gearing and Capital Gains Tax (CGT) arrangements from the 1st of January 2020. The ALP reforms will: Limit negative gearing to brand-new residential housing only from 1 January 2020. All residential property investments made prior to this date will not be affected by the changes and will be grandfathered. Halve the CGT discount for assets purchased after 1 January 2020, reducing the CGT discount from assets held longer than twelve months from 50 per cent to 25 per cent. All residential property investments made prior to the 1 January 2020 will be grandfathered. The Coalition will make no changes to negative gearing or CGT concessions. The impact of proposed ALP negative gearing and CGT changes The clear outcome will be that second-hand residential properties will be more expensive for investors to hold. Under this policy, losses can only be used to offset income from the property itself. Most properties run at a loss, any additional deductible losses over and above the rental income will be of no financial benefit while the property is owned. When the property is sold, if the CGT discount is reduced, property investors will have an increased CGT liability payable on any capital gain achieved. Additional economic flow on effects to the property market could include: a further decline in housing prices across the board less second-hand housing stock available on the market as investors hold on to grandfathered properties a possible reduction in the supply of new homes. Although owners of new properties will still be able to negatively gear, these properties when sold to investors will not be eligible down the track and this will affect their capital growth an expected decrease in available rental stock for tenants as investors withdraw from the market increasing rents as investors seek a higher rental yield to make up for the lack of tax concessions and demand outweighs available rental stock many property owners will fall into a negative equity scenario, where the size of their loan outweighs their property value putting them at additional risk of mortgage default. Key facts to be aware of behind the negative gearing policy debate The ALP argues property investors and the tax concessions they receive are helping to push up property prices. They believe first home buyers are being locked out of the market as a result. When considering negative gearing policy changes, it’s important to be aware of fluctuating trends in markets across Australia. Property prices in different cities are known to move at different times and external factors such as employment, infrastructure, population growth, migration, housing stock shortages and changing demographics play a role in property prices and affordability. Other factors, such as lending restrictions for investors by banks and depreciation legislation changes for owners of second-hand residential properties, are already having an impact on property markets. While national dwelling values have been high in recent years, CoreLogic has reported the peak occurred back in October 2017. Since this time, there has been a 7.4 per cent fall in national dwelling values to the period to the end of March 2019. This fall translates to a $40,590 decline in national average dwelling values. The peak (and subsequent fall) in property prices was led by Sydney and Melbourne. In Sydney, values are 13.9 per cent lower than their peak (a decrease of $124,739) and in Melbourne values are 10.3 per cent lower (a decrease of $71,404). Hobart is the only major capital city where values are yet to fall from their peak. With property values already falling across most of the country, the Coalition argues changes to negative gearing tax concessions would be a sledgehammer to an already struggling property market. Two other ALP arguments behind the party’s reason for changing negative gearing concessions are also critically flawed. They argue that negative gearing concessions: predominantly benefit high income-earners are allowing investors to expand their portfolios to buy their fifth, sixth and seventh properties. The latest Australian Taxation Office (ATO) data shows 71 per cent of landlords had only one rental property for the 2016/2017 financial year. This same data also showed 64.1 per cent of investors had a taxable income less than $80,000 and accounted for 60.5 per cent of negatively geared properties. High income earners with a salary more than $180,000 accounted for just 7.3 per cent of those with negatively geared properties in 2016/2017. BMT Tax Depreciation data for residential property depreciation schedule requests in the 2017/2018 financial year also shows that 93 per cent of investors ordered a schedule for just one property. We encourage you to review each of the major party’s policies in more detail and make an educated decision on polling day. To learn more about negative, positive and neutral gearing, read our negative gearing: basics for beginners article. Should you have questions, we’d be happy to help as best we can.

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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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