PROPERTY INVESTOR MISTAKES AT TAX TIME
According to the Australian Taxation Office, there are over 2 million landlords in Australia. More and more Australians are building wealth through the property market with over a quarter of these owning more than one investment property.
There are a number of mistakes property investors make when it comes to claiming expenses for investment properties. Let’s look at some common mistakes and ensure you claim exactly what you are entitled to.
Interest
Mistake 1: Claim interest relating to funds used for private purposes
It is important to keep your investment borrowings separate from funds used for other purposes, so that when you are claiming interest it is clear that it relates exclusively to the investment property (for example, to purchase or renovate a rental property and to buy a car – you cannot claim the interest expense on the private portion of the loan (the car).
Have a completely separate loan for your investment property and if some of the funds are obtained from a loan on your owner occupied home, make sure it is separated into a separate loan or split with its own bank statements.
Initial repairs and capital improvements
Mistake 2: Claim initial repairs or capital improvements as an immediate deduction
Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are capital expenditure and may be claimed as capital works deductions over either 25 or 40 years, depending on when the repairs were carried out.
Capital improvements (such as remodelling a bathroom or adding a pergola) should also be claimed as capital works deductions.
Accountant
Mistake 3: Using an accountant that doesn’t understand property.
As a property investor it’s invaluable, particularly around tax time to have an accountant who is experienced in property.
The experienced accountant will be up to date with the property laws, giving you the correct advice into what you can and can’t claim. Take the time to find out what their experience and level of expertise is before choosing an accountant. One of the best ways to do this is to ask different accountants questions about property investing. Do they answer the questions thoroughly? And more importantly, are they relatable and can you understand them?
Legal expenses
Mistake 4: Claim conveyancing costs
Conveyancing expenses that you incur during the purchase and selling process are usually not deductible. Instead, these costs make up part of the cost based for capital gains tax purposes.
Travel expenses
Mistake 5: Claim travel costs for visiting a property, when it’s not the main purpose of the trip.
Traveling costs incurred to inspect an investment property were tax deductible until May 2017 Budget to the extent that the purpose of the trip was solely to inspect the property. Where there is private components of a trip, these need to be apportioned appropriately. There will be a blanket ban on travel expense claims post May 2017 budget, which means deductions for travel to inspect, maintain or collect rent on a property will be disallowed.
Keeping good records and a travel diary would help substantiate any claims.
Allocation of rental expenses
Mistake 6: Claim expenses for private use of the property
Investment properties, typically holiday homes may have some private usage involved. If the property is used privately and not available in the holiday let pool, the holding expenses such as interest, rates and water should be apportioned on number of days used privately and not available for rent.
It is prudent to keep a log or diary of the private usage and provide this to your accountant.
What you can claim
- Real estate management fees
- Council and water rates
- Advertising for tenants
- Insurance
- Interest on your investment loan
- Depreciation on assets like whitegoods and air conditioners
What you can’t claim
- Those relating to your personal use of the rental property
- Utility bills paid by the tenant
- Borrowing costs where you have borrowed against the equity in the investment property for private use
- Costs relating to the purchase or sale of the investment property
For an honest and unbiased opinion, talk to Think and Grow Finance today on 03 8390 5855 or email mitesh@thinkandgrowfinance.com.au
*Please note – Think & Grow Finance does not provide tax advice and the article above is general information only. Readers should always assess their situation accordingly and seek tax advice with a qualified accountant/taxation adviser.