Along with other investment markets, property tends to move in a recurring theme: boom, bust, recovery and growth. This cycle, however, is not reliable. While tax should never be the sole reason for any investment, it is helpful to review the taxation implications at each stage of the property ownership cycle.
Acquiring your property and figuring out initial costs
Acquisition costs are generally not deductible, but any borrowing costs incurred can be deducted over five years. Initial repairs are generally not deductible either, but expenses such as advertising for tenants are, provided the property is for sale. One approach would be to claim depreciation on your investment as a capital works deduction over 40 years.
Find sustainable ways to manage maintenance costs
Depreciation can only be claimed where the property is tenanted and expenses are deductible only in the year they are incurred. Depreciating items such as appliances and furniture are deducted over a number of years. But keep in mind that capital costs, such as doors, built-in robes and renovations, form part of the cost base of the property.
Investors may claim a tax deduction if the dwelling was constructed after 17 July 1985. The building cost can be depreciated at a 2.5 per cent rate per annum (four per cent if constructed between 18 July 1985 and 16 September 1987). A quality surveyor can prepare a depreciation report for these properties. You’ll save enough in deductions to recoup their fee within the first year.
When it’s time to get a new tenant
Costs incurred while preparing a property for sale are deductible, even after a tenant has vacated, provided they relate to the period of rental. For example, painting would be depreciable however, capital improvements such as a new bathroom generally would not be. Some of these expenses will form your cost base as well, including: agent’s fees, advertising and legal fees relating to the transfer of title.
Surviving and thriving as a property investor
It’s just as important to manage your finances as it is to manage your sanity. There are lots of small ways to make your property work for you. Claim as many trips to see the property as you like, so long as the sole purpose is to genuinely inspect it. If you’re expecting a lower income next year (due to factors such as redundancy or maternity leave), consider not prepaying interest for up to 12 months in advance before year end on your rental property, which will reduce your higher income. Keep your receipts. It is essential you can explain and justify every one of your claims. Defer taxes for another year by waiting to sell your property and exchange contracts until after 1 July. And lastly, as with anything in life, surround yourself with quality people. Hire great accountants and surveyors and see the returns on those investments for years to come.
If you would like additional, or more personalised tips regarding how to make taxation work in your favour as an investor, contact the experienced team at Nieuvision today.
This information is of a general nature only and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances before acting.