Residential property investors taking advantage of low interest rates should pay particular attention to their end of financial year reports or risk a nasty tax-time surprise.
Blogger: Hung Tran, property specialist, BDO Private Clients
Some tax measures tend to face particular scrutiny.
While the negative gearing debate has dominated the recent property investment narrative, those preparing their FY15 statements should know there are existing policies that could present a challenge.
Ignorance is never an excuse when it comes to claiming on a property investment, and there are several lesser-known tax treatments that could trip up first-time investors.
Renting to a related party
If an investor is renting to a related party and wants to maximise deductions, it’s vital to make sure the rent being paid reflects market value.
For example, if renting an apartment to a son or daughter attending university, or renting a holiday home to your parents-in-law as their full-time residence, the value of this rent should be reviewed annually and reflect market value rent had the property been rented to an independent third party.
While multi-purpose bank loans – as opposed to either pure investment loans or private loans – are most common for property investors, they need particularly close attention at tax time.
Where a property investor has used some of the funds from a multi-purpose bank loan to fund their investment, but not all, the interest incurred is not wholly tax-deductible.
There can also be complications with these type of loans when it comes to repayments.
For those considering a property investment in the new financial year, it might be worth considering a more straightforward option.
Repair v capital items
Property investors that have purchased an older dwelling on which they have conducted work need to understand the difference in tax treatment between a repair and a capital improvement.
Only repairs – not improvements – are tax-deductible and this is often an area of intense scrutiny.
Generally, a repair brings an element of the property in line with its original condition, while an improvement goes beyond its original state. Some stipulations consider whether or not the property is rented.