Property investors warned about ATO crackdown

The private owners of rental properties throughout Australia need to ensure that their tax affairs are in order.

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Blogger: Daniel McQuillan, principal partner, Investwise 

The Australian Taxation Office (ATO) had issued a warning that they will be paying particular attention to tax returns by owners of rental properties for the 2013/2014 financial year.

From July 1, thousands of Australian property investors will be submitting their tax returns and it is really important that they ensure everything is in proper order.

The ATO has highlighted a number of common errors made by rental property owners that include:
•        Claiming rental deductions for properties not genuinely available for rent


•        Incorrectly claiming deductions for properties only available for rent part of the year such as a holiday home

•        Incorrectly claiming structural improvement costs as repairs when they are capital works deductions, such as remodelling a bathroom or building a pergola, and overstating deduction claims for the interest on loans taken out to purchase, renovate or maintain a rental property

Building a successful property portfolio is a key objective of most mum and dad property investors when they purchase their first investment property and it is very important that taxation issues are properly addressed right from the start.

Over the past year, Investwise has recorded a surge of activity by property investors in Perth, for example, with investors accounting for up to 40 per cent of sales in some suburbs.

Most investors now understand that they need several properties to create wealth and ultimately fund their retirement.

The very first property you purchase will determine your future success in building a successful property portfolio and that is why it is important to carefully undertake as much research as possible before investing in real estate.

Some of the most common mistakes to avoid when buying your first investment property include:

•        Buying a property in a location which is not attractive to tenants, ie not close to amenities such as shops or transport. These types of properties will generally have higher vacancy rates and lower rents which again limits the cash flow of the property investor

•        Buying the property with a principal and interest loan similar to purchasing an owner-occupier home. The interest component of the loan is only tax deductible for tax purposes and the amount of money you spend on paying off the principal limits your cash flow to purchase additional properties. That is why investors prefer interest only loans

•        Buying an older property which can drain their finances through maintenance costs. New properties may come with a builder's warranty and they also allow investors to claim the maximum tax depreciation benefits

•        Not undertaking a full assessment of the true cost of buying and holding the property. For example, if the property is an apartment, there are additional cost issues compared to buying a stand-alone house such as strata fees. Very high strata fees can eat into your cash flow which can limit your ability to buy more properties

•        Purchasing a property in an area where there is an oversupply of properties meaning rents will be low and capital growth rates limited. Without capital growth, the investor will not have enough future equity in their property to use as security to purchase a second and third investment property

•         Trying to select the tenant themselves rather than using the services of a number of reliable property management companies. Bad tenants will not pay their rent and damage the property. After experiencing a bad tenant, many first time investors often sell their first investment property because of the financial losses incurred

•         Buying an investment property with the view to a quick return rather than viewing it as a long-term investment and stepping ladder to purchasing a portfolio of properties that will fund their retirement

About Daniel McQuillan

Daniel McQuillan has held senior positions in the property and financial services sector for over a decade. During that time he has gained professional qualifications and a wealth of experience that has enabled him to personally build a very successful property portfolio based on a targeted plan. In 2011, he established Investwise so he could utilise these skills to help other people create wealth through similarly devising a personal investment model that best suited their personal circumstances. As a result of this targeted and personal approach to property investment, Investwise is now one of the fastest growing property investment advisory services in Western Australia.

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