As June 30 fast approaches what should the savvy property investor be doing to prepare for tax time?
Let’s have a look at 7 property investment tax tips:
1. Documentation
Summaries of all your rental income and expenses.
This is much easier if you have your management agent looking after your property where they pay all expenses and collect all income. They will normally provide a monthly and annual statement.
Ensure you have all bank statements showing interest expense. The annual statement should show a summary of interest expense.
A specialist property accountant can assist by ensuring all allowable tax deductions are made.
2. Prepayments
Prepayment of expenses including rates, insurance and other annual charges can help reduce current year’s tax.
Interest prepayments can only be made if interest is at a fixed rate not if variable.
3. Depreciation
Only registered quantity surveyors are generally authorized to prepare depreciation schedules.
If you are contemplating a renovation a quantity surveyor can produce a scrapping schedule which puts a value against all items to be thrown away. This value is expensed in the year of expenditure. The new items are then depreciated with a new depreciation schedule.
4. Travel
All your costs to inspect your investment property are tax deductible, including travel. Ensure you apportion any personal component.
5. Interest Expenses
Only interest expenses on borrowed funds used to invest are deductible.
It is the purpose of the loan which determines deductibility not the security used to obtain the loan.
A split loan should be considered when a loan is used for both investment and private purposes
If capitalizing interest the tax office may require evidence of correct documentation and intention.
Interest deductibility should be easy but if not properly documented and managed this expense can cause frustration if the ATO decides to review and so the assistance of a specialty property accountant should be used.
6. Trusts
The use of a Trust can be a major benefit to property investors by improving asset protection, estate planning and increasing flexibility.
If using a Trust ensure it has been correctly set up and operated to ensure you do not lose your interest deductibility which is fully allowable by the ATO if you meet their requirements.
7. Cash Flow
If the property is negatively geared consider applying for a 1515 Tax Variation so that your tax is reduced each pay and not at year end. This will improve cash flow and could assist in reducing your overall interest charges.
Ask your management agent to deposit rental income within 7 days of receipt not at month end.
If you have an apartment without individual water meters put a special condition in your lease that the tenant will pay water usage as billed to you.
