Property & Investment: Being tax smart
If you own investment property, there are some legitimate ways to be tax smart as well as some traps to be mindful of.
If you're a property investor in Australia, then it's likely you're taking advantage of negative gearing, capital gains tax discounts and the ability to deduct certain costs such as maintenance. So how can you ensure you're tax smart about your property?
If you own a rental property in a known holiday spot, then it's pretty likely that the Australian Tax Office will look closely at any costs you claim as deductions. If you rent out your holiday home, then you can only claim expenses for the property based on the time that the property was rented out or genuinely available for rent.
If you allow family or friends to use your holiday property for free – or at a reduced rent – then it is unlikely to be considered as available for rent and that may reduce the deductions that are available. It's a hard balance to get right if you allow friends or relatives to use the property in low demand or off-peak times.
A property is more likely to be considered unavailable if it is not advertised widely, is located in an unappealing location or is difficult to access, and the rental conditions make it unappealing and uncompetitive. Such conditions may include the price, no children clause, references for short stays as just a few examples.
The ATO looks closely at deductions that are claimed for repairs and maintenance, so it's important to understand what is and isn't claimable.
Understanding the distinction between "repairs", "maintenance" and "capital works" is important, as this is one of the most common areas of confusion. Repairs and maintenance can generally be claimed immediately, however the deduction for capital works is generally spread over a number of years.
Repairs must relate directly to the wear and tear resulting from a property being rented out to tenants, holiday makers or other renters, for example:
- Fixing a fence
- Fixing a toilet
The following, however, are considered to be capital works rather than repairs:
- Replacement of entire structure e.g. a new fence, a new hot water system, ovens etc
- Improvements and extensions.
Remember that any repairs and maintenance undertaken to fix problems with your property at the time the property was purchased are not tax deductible.
If you fly to inspect your rental property, stay overnight, and return home the following day, all of the airfares and accommodation expenses would generally be allowed as a deduction. Where travel is combined with a holiday, your travel expenses need to be apportioned. If the main purpose of the trip is to have a holiday and the inspection is incidental, a deduction for travel is not allowed.
In these circumstances you can only claim a deduction for the direct costs involved in inspecting the property such as the cost of taking a taxi to see the property and a proportion of your accommodation expenses. If you drive a car to and from your rental property to collect rent or for inspections, you can claim your car expenses. Just keep in mind that you need to be able to prove that you needed to visit the property.
The interest component of your investment property loan is generally deductible. Take care if you have made redraws on your investment loan for personal purposes. A portion of the loan may be non-deductible.
You are able to claim a deduction for borrowing costs over 5 years such as application fees, mortgage registration and filing, mortgage broker fees, stamp duty on mortgage, title search fee, valuation fee, mortgage insurance and legals on the loan.
Life insurance to pay the loan on death is not deductible even if taking out the insurance was a requirement to get finance. If the loan is repaid early or refinanced, the whole amount including mortgage discharge expenses and penalty interest become deductible.
Contact us on 02 9957 4033 for more information about being tax smart about property investment.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.