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Own a Rental Property? Know Your Tax Deductions

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Rental properties are a very lucrative investment opportunity for those involved in real estate. Apart from creating a property as an investment, it also turns the investment as a regular source of capital from tenants. However, rental properties also come with some significant taxes. But if you are smart enough, there are ways to save on the taxes. Let’s take a look at how you can claim tax refunds on your rental property.

Capital Gains and Tax

Before we delve into claims about tax deductions, we must understand an important concept: Capital Gains Tax. A capital gain is when the selling price of a property is more than its cost base. A capital loss is the reverse; the selling price is less than the cost base. The CGT is applicable when you derive capital gains from selling your property.

To minimize your CGT, the straight route is showing the capital gains as low as possible. There are perfectly legal ways to do so, primarily by including all possible expenses into the base cost of the property. You can also apply for capital losses from previous years if any. Creating the investment property depreciation schedule and capital works schedule is another way.

Tax Deductions You Can Claim

There are a variety of expenses you can claim for tax deductions, like:

  • Advertising expenditure for finding tenants
  • Any interest incurred over property investment loan
  • Insurance of the property
  • Travel expenses incurred while traveling to inspect your property (subject to scrutiny)
  • Water costs
  • Council costs, if any
  • Management fees of your real estate, if you hired professional help for the same
  • Deprecation on residential rental property assets like air conditioners

While it seems straightforward, being able to claim these tax deductions come with certain requirements. For starters, you must maintain all physical bills and/or bank statements for transactions covered above. Two things must also be maintained accurately: depreciation schedule and capital works schedule.

The depreciation schedule lists all the properties/assets you own on the rental property. It also mentions how much you can annually claim in depreciation tax deduction on rental property. The capital works schedule consists of the building and construction costs of the rental property. It is important to maintain all the bills while you were building the property. In case the bills are amiss, one can ask an architect or builder to assess the costs involved in the construction of the property.

Tax Deductions You Can’t Claim

There are also certain costs that you can’t claim for tax deductions:

  • Any cost incurred while you used the rental property for your personal use
  • All the utility bills paid by the tenants, like electricity, etc.
  • The inherent costs associated with buying and selling of properties are already included within taxes and thus cannot be claimed for tax deductions
  • Sometimes, owners borrow money against the property, like selling its equity or mortgaging it. The costs involved in such loans cannot be tax deducted.

Note: While we mentioned that inherent fees involved in buying/selling of properties are not eligible for tax deductions, many other charges during the buying/selling can be eligible for the same. Thus, it is advisable to maintain all bills of the process.

Final Words:

Rental properties are a great investment opportunity. By claiming the tax deductions in the right way, you can increase your profits from your property even further.

Rental Property Deductions You Need to Know

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Like any house, there are regular maintenance works to be carried out, and also ad hoc repairs for sudden damages or breakages. As a landlord, you are not only responsible for having those done on time, but you also need to cough up the money for those expenses, which shaves off a bit from the rental income you receive. The effort put into maintenance work can’t be substituted, but as per the depreciation rules for rental property, you can cushion some of the financial impacts.
Rental Property Depreciation Report Offers Way Out

When you are earning rental income from a property you own, there are several expenses which can actually help you reduce your tax outlay. Those expenses can be made part of your rental property depreciation schedule and then those amounts can be deducted from your taxable income, thereby reducing your tax liabilities. Let us take a look at some of these rules which can help you at tax time.
One of the biggest expenses that can be added to your rental property depreciation report is what you spend on the upkeep and maintenance of your property. For example, the fees paid to carpenters or plumbers for repairs, or gardeners for regular maintenance, and also painters or carpet layers for occasional work. These could be either in the form of one time fees or even regular wages. In order to be able to claim a deduction on these expenses, you need to collect and submit each service providers tax identification number as well. If the amount paid to them is above a certain amount, you might also need to submit additional details in specified forms. If you consult a good firm like Deppro Victoria, they would help you with all the relevant rules and also provide the required forms that need to be filled up.
Apart from the money paid to service providers, some other expenses are also useful in reducing your tax burden. One big area of expense is the money paid for utilities or taxes, which can often be set off against taxes, depending on where the property is. Costs incurred on travel or entertainment of employees can also be listed in the tax deduction charter. For example, an employee gets together can be listed under the head of such expenses. Depending on which location you pay tax at, all employees or business associate expenses might not be deductible, and you need to find out your local rules before you file your tax returns.
The important thing to note is that tax laws have several provisions to cushion the tax impact on landlords, but may get overlooked due to lack of knowledge. If you do your research well or employ a good consultant, you can reduce your tax substantially.

Why the Depreciation Shake-up Gives Off-the-plan Investors an Edge at Tax Time

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The year 2017 saw some changes brought about in the rules governing depreciation on investment property in Australia. The attractive option for claiming tax deductions due to the depreciation of the property value saw a cutoff date being applied – 9th May 2017. People who bought a second-hand property after date could no longer claim the deductions, as per the ATO regulations.
An Overview of Depreciation

We know that any asset undergoes wear and tear as it continues to be used. Accounting principles look at this reduction as a standard percentage of the value which gets reduced from the value of the asset. Under tax laws, this depreciation amount could be set off as a deduction from the tax payable. This would make a substantial change in the cash flows of a property owner. Based on the cost of the property, maintenance costs, reduction in value, and the reduction in tax payable, the depreciation could impact the net yield on investment property.
The New Tax Law

From May 9th onwards in the year 2017, second-hand property purchased would not attract the tax deduction. The only two categories allowable were new assets added to older homes and assets in new homes would allow admissible deductions. Those who were off this new plan could continue to claim under old rules. Also, capital works investments and fixed items added could still be claimed. But any assets that came along with the property went out of the purview of the deduction.
The Better Option between New and Second Hand

Because of this change, property owners needed to rethink their investment strategy. Back of the envelop calculations seem to present a clear picture. It was seen that a new property could work out much cheaper than investing in an older property of the same value. The detailed working of the investment property depreciation schedule ATO would provide a similar answer. What this does is to take the tax benefits out of the equation. So an investor should look at the cost-benefit analysis of the property only. Tax deduction benefits would cease to make a difference to the numbers. So how do the new tax rules affect the comparison between old and new? A property purchased in 2016 might turn out to be of similar value to a brand new property purchased in 2018. This needs investors to recalibrate their calculations carefully and in advance.
Conclusion:

In order to get the best property investment returns, an investor would need to calculate carefully. The best way is to leave it to the professionals. Consultants like Deppro could depute their qualified quantity surveyors to get the math right. They would set up the depreciation schedule according to the purchase date. The ATO has detailed lists of what can be claimed and for how much. These quantity surveyors would work out the numbers in accordance with these ATO guidelines. The amount that such a report would cost could ensure savings of higher amount if the calculations are done by a professional.

7 Questions You Should Ask Your Quantity Surveyor

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Before that time of year rolls around again, when you have to file your tax return, you need to begin preparing your documents. While the income and expenditure are fairly straightforward, most people get stuck while preparing their tax depreciation schedules. That is why most people lean on professional tax consultants for this. If you own an investment property or a rental property, you may also require the help of tax depreciation surveyors who can make an assessment of your property and then prepare the submission schedule. Before you hire the services of such a surveyor, there are some important things which you should ask your quantity surveyor.

1. Do You Have Certified People Or Will You Outsource?

The survey work for property depreciation schedules can’t be done by just anyone; only certified and qualified surveyors can do it. But many tax consulting firms outsource the work of surveying to smaller firms. In such cases, you run the risk of having the survey done by someone who isn’t certified. Therefore, it is vital that you check with the firm as to whether they outsource any of their work.

2. Do You Have Insurance Coverage?

Surveying involves a whole lot of measuring at your property, for which surveyors need to often climb ladders or onto roofs. If they suffer a fall or any other kind of mishap, it would pose a major issue. That is why it is advised that you only hire firms who have insurance coverage.

3. What Are The Services You Provide?

The quantity surveyor tax depreciation only do the survey and measurements. After that their would need to prepare your returns as well. That is why you need to find out whether the firm you are employing only does surveys or can they provide end to end services.

4. Do You Have Any Questions For Me?

Every property has its own special features and would be differently treated by tax laws. Before the surveyor begins his or her work, you need to show them around and ask questions about your property. The answers to those questions and the surveyor’s own questions to you would tell you how well the survey would be done.

5. What Elements Would Be Included In The Depreciation Report?

Like we previously mentioned, a quantity survey is the start of your tax declaration and claims process. The Deppro quantity surveyors would finish their job and hand it over to their colleagues who would complete the rest of the process. You need to know from the surveyor what elements he or she will include in the report because that would determine the tax deduction amount.

6. What Categories of Properties Do You Handle?

It is important to learn what kind of properties their firm specialises in. There are firms which would be doing the surveys for commercial or industrial properties only. So, they might not have the required expertise regarding residential properties. It is preferable to work with someone who knows their stuff.

7. What Is Your Fee Structure?

Last but not the least; you need to know how the surveyor would charge their fees. There are some who charge a flat fee, while there are others who charge as per the square feet area of the property. There could be some others who charge a percentage of the total amount in the depreciation schedule.

Conclusion:

Asking the above questions will not only help you know how professional your quantity surveyor is, but it will also help you learn some extra information about your own property.   If you think there should be some more questions which are important to ask your quantity surveyor, please let us know so that we can share those with our readers and customers in our next post.

Tax Considerations When Investing in Australian Properties as an Expat

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Investors invest in Australian property for a number of reasons. Among the other advantages, such as the location and stable investment options, tax advantages constitute one of the primary reasons for the decision.

That said, there is a different set of tax laws for Aussies who live overseas. Does it make it a less attractive option to invest in the properties in Australia? Certainly not, if you make some fundamental considerations before proceeding with your investment decisions. Read on further to find out more about these tax considerations.

Key Tax Considerations for Non-Resident Aussies before Investing In Australian Property

  1. Tax Deductions: If you rent out your newly purchased property in Australia, you can claim tax deductions relating to the costs of maintaining it. This includes both cash and non-cash deductions.
  2. Depreciation: In layman’s terms, tax depreciation is a form of tax deduction which is concerned with the reduction in the renovation and improvements of rental property. You can claim it on your tax filings in connection with your income. It considers the fact that certain improvements such as carpets, kitchen cupboards and curtains that you make to your property on rent are likely to diminish in value over time. This generally happens due to wear and tear.
  3. Negative Gearing: Negative gearing refers to a kind of financial leverage wherein an investor borrows a certain amount of money with the objective of owning a piece of property to generate income. Normally, the piece of property in question is greater in value than the income which is likely to trickle into the wallet of an investor due to the investment.

If you are seeking ideas about claiming depreciation on investment property based on negative gearing, you can use this concept to cut down your losses with respect to your other income sources. This will help you to minimize your overall tax liability and taxable income in a year. Whether you are a native or non-resident Australian, you are entitled to receiving the benefits of negative gearing to reduce your losses.

  1. Capital Gains Tax: Sometimes the value of a property may hit the upward trajectory owing to various reasons. If an investor holds a piece of property for at least twelve months and decides to sell it thereafter, they become eligible to claim the capital gains tax. It involves one’s marginal income tax rate and provides a tax discount on 50% of capital gains to Australian residents. Unfortunately, if you are not an Australian resident you do not receive the benefits unless you qualify for it by meeting certain tax laws.

Conclusion:

When it comes to dealing with Australian tax laws, the wise thing to do is get in touch with an expert from a reputable depreciation service firm such as Deppro. Irrespective of whether you are a resident or non-resident, do not forget to consult the experts from a reputed firm before filing your depreciation claim to be on the safe side. They can be the real guardian angels for you when you are in a state of a fix.

Depreciation rules for your rental property | Articles from around the web

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Confused about depreciation rules for your rental property? Did you even know there were rules in the first place? Depreciation, tax and claims processes are large and confusing mazes, so we gathered articles from around the web that make things crystal clear.

 

The One Depreciation Law Change You Absolutely Need To Know by Deppro

Investors who hold both commercial and residential properties were thrown for a loop in May 2017. Starting from July, the beginning of the new financial year, the Federal Budget came into effect with new depreciation rules. These rules affect what owners can claim which in turn claims how much they get back over time.

 

How Rental Property Depreciation Works by Investopedia

Investopedia is a useful website both novices and experts can refer to. The page linked above goes into the basics of depreciation such as how it’s calculated and when it ‘begins’. Hint: it’s not actually after the settlement date.

Make sure you’re square before the tenants move in

 

Top 10 tips to help rental property owners avoid common tax mistakes by the ATO

Rental property owners must navigate complicated tax rules. Not navigating them correctly leads to costly penalties. To help the common Australian investor, the ATO made a top 10 list of tax mistakes to avoid. These include what type of expenses to claim, as well as the right portion of costs and how to keep the right records.

If you need a printout to have on your nightstand, there’s a PDF available to download.

 

Claiming Depreciation on Investment Property: The property investor’s complicated friend by Investor Assist

This page is a one-stop-shop for investors wanting to know more about the process. There’s an uncomplicated list of depreciation rules, definitions and examples of what assets you can claim.

The page also describes the methods used to calculate depreciation costs, prime cost vs. diminishing value. But the quantity surveyor handles these calculations, not the investor. Once the values are worked out they go into the depreciation report. This crucial investment tool is recommended at the end of the page as the final step of claiming depreciation on an investment property.

Need more advice? Read these:

  1. Rentvesting: a forgotten way to own and rent at the same time
  2. Behave like a 1% investor with these tips

How your depreciation schedule give you bragging rights

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Having a depreciation schedule isn’t anyone’s idea of a ‘must-have accessory’ but it pays off in more ways than one. Seasoned investors and business owners with several properties under their belts know well the bragging rights they’re afforded when they’ve got the depreciation schedule in their hands.

 

It’s less work
Tax time is the bane of most people’s existence . Organising account information, making sure expenses are correct and the like is a pain if you’re not organised. When you own investment properties, or brick-and-mortar stores, the amount of work increases substantially.

This is where the depreciation report comes in. After the quantity surveyor does their walk through and the company mails you the report, a large bulk of the tax reporting for those properties is complete. You don’t have to triple-check bills or receipts for a long time unless you do renovations.

 

It lasts for a LONG time
Ordering a depreciation report isn’t an annual task. It’s valid for the lifetime of the property. Companies like Deppro create reports that last forty years, so you’re set for life, or at least as long as you have the homes/shops in your portfolio.

This means, though, you must act quickly. As soon as you settle the deal with the real estate agent, get the depreciation experts in to assess. They prefer to see everything in the condition you bought it to make an accurate report. If the previous owners made renovations, then that’s a bonus as you’re eligible to claim their work in the report!

 

More (money) for you
The biggest bragging right of all? You’re paying less tax! Because you got the depreciation report done and passed off to your accountant in record time, there’s more money flowing back to you come tax time.

Fun fact: the fee for ordering the depreciation schedule is deductible.

A depreciation report isn’t glamorous, but its benefits are worth their weight in the size of your tax return. You can feel a little smug having less work on your plate organising expenses. Your accountant has the report, and you have the time to run your business.

How to get on top of property depreciation

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Property depreciation is a crucial part of managing your taxes and rental property. If you don’t do it, you’re missing out on cash – lots of it. So how does one get on top of their tax depreciation?

 

First thing’s first: get an expert. Companies like Deppro prepare depreciation reports/schedules that are ATO compliant. Their staff evaluate items for their lifetime value and prepare the report, detailing how they will decrease in value over time. Things in and around the home fall into two categories: plant and equipment, or capital works

 

Second, get the expert to come as soon as you settle with the real estate agent. Quantity surveyors work best when they see the items in the condition you bought them. If the previous owner has done renovations, you can claim deductions on their work! The ATO will only accept a property depreciation report created by a quantity surveyor, not an accountant. This is because they’re the most qualified to do it. You wouldn’t expect someone who estimates material costs for a living to write your tax return.

 

That said, the third step is to get your accountant on your side. They help you with your tax return every year, making sure you’re not missing anything you’re eligible to claim. The accountant will treat the property and depreciable items as another asset to claim. They’ll need the property depreciation schedule to properly write out the returns over the years.

 

Another helpful way to get on top of property depreciation is to make  sure you’re buying a property that will pay for itself over the years. A house or apartment that’s recently renovated and meets the criteria to generate high rental income is ideal.

 

Property depreciation is difficult to wrap your head around. To get on top of it, it’s absolutely necessary to call in experts like Deppro not long after your settlement. When you’ve got the depreciation schedule in hand, you’re set for life, or at least the next forty years.