The tax trick that property investors need to get their renovation deductions in order
Knowing the difference between renovations and repairs can mean the difference between a timely tax return and an audit ...
Negative Gearing has become a bit of a buzz word that is often used and not fully understood. People believe that if they negatively gear they will get a large tax refund. This however is not achieved unless you seek the right advice before purchasing your property and claim the right things.
Blogger: Brad Callaughan, Callaughan Partners
The ownership percentage of your property can make a huge difference. Negative gearing is more beneficial if you are in a highest tax brackets, however it can still have its advantages for people on middle incomes, with the use of non-cash expenditure such as capital works write off and depreciation. We strongly recommend to every client to get a quantity surveyors report straight after purchase. This in itself can account for thousands of dollars every year without the physically outlay of the money each year.
Another recommendation of mine would be to get your accountant to fill out a PAYG Variation each year. Effectively this will allow you to get your lump sum refund from the negative gearing benefit back in your pay each week, fortnight or month through the reduction in the amount of tax you were paying weekly, fortnightly or monthly.
As a property investor seeking a tax benefit you are always looking for the greatest amount you can claim in regards to the expenses on your rental property for the year. Given the confusion with capital expenses versus outright claimable, we set out below what you can and can't claim.
Before we begin though, I would like to point out the importance of record keeping. Without records and receipts we cannot claim a deduction. I get asked if there is any secret to record keeping, there isn't. Just file all your receipts into a A4 arch lever folder as you pay for it. If you are inclined you can break your expenses further down, but if not just get the receipt into the arch lever folder and let your accountant do the rest.
You cannot claim a deduction for the costs of acquiring or disposing of your rental property.
These types of expenses below are capital in nature and go to the cost base of your property:
• advertising to sell,
• agent commission for selling,
• legal fees/conveyancing on the purchase and sale,
• stamp duty on the purchase,
• Capital improvements
• travel expenses to inspect before purchase
• expenses not actually incurred by you, such as water usage or electricity expenses
Accounting Fees - Bookkeeping costs, end of year fees or advise from your accountant regarding the property.
Advertising for Tenants - The cost to find tenants is deductible.
Bank Charges - Are deductible.
Body Corporate Fees/Strata Title Fees - These are to cover the shared running costs of the building such as repairs, insurance, gardening, communal lighting, etc.
Borrowing Expenses - Borrowing expenses include mortgage insurance, title search fees, registration of mortgage, stamp duty on mortgage and loan establishment fees. They are totalled and written off over 5 years.
Capital Works - Special building write off , based on the actual cost of construction. The quantity surveyor report gives you the amount deductible.
Cleaning - Internal and external cleaning is tax deductible along with the cost of materials.
Depreciation - Given to you on the quantity surveyors report.
Computer - Small proportion of computer depreciation for related use.
Gardening - Included cost of mowing lawns, yard maintenance etc.
Insurance - Building and landlord insurance.
Interest - Interest on a loan to purchase or used for income producing purposes.
Land Tax - Determined by OSR and is deductible for income producing assets.
Lease Expense - Normally organised by the agent and is deductible.
Legal Expenses - Legal fees to evict a non-paying tenant.
Mortgage Discharge Fees - The costs to discharge your mortgage.
Office Supplies - Stationery & postage
Property Management - Management fees paid to real estate agents to handle collecting the rent and paying the expenses.
Pest Control - Professional costs to make your property pest free.
Quantity Surveyor Expenses - The cost to prepare the surveyors report.
Prepaid expenses - If you prepay a rental property expense - such as insurance or interest on money borrowed
Rates - Council, water and sewerage are deductible.
Repairs - Repairs that need to be made to make the property inhabitable and attractive to rent. Be careful your repair won't be classed as an improvement. Repairs at the end of the tenancy will also be deductible even if they are to revert it back to a private residency, as long as done within that year. Repairs undertaken within 12 months of the purchase will not be allowed as a deduction.
Security Expenses - Security patrols
Telephone Expenses - Calls made to in relation to the rental property also a proportion for internet for emailing the agent etc..
Travel - Travelling to inspect or maintain your property or collect the rent, you may be able to claim the costs of travelling as a deduction. This includes flights, car hire, meals, Cabs etc only if the sole purpose of the trip was to inspect the property and was only over night. If you take the whole family and inspect the property 1 out of the 7 days you have to apportion your expenses.
About Brad Callaughan
Brad Callaughan is a specialist in taxation, accounting and business advisory. He is the managing director of Callaughan Partners that was formed to deliver and exceed client’s expectations, whilst charging upfront fees. Brad is an avid property investor and renovator. Brad is also a strong force behind the development as well as sitting on the board of the Ross Hutchinson Foundation. He can be contacted at http://www.callaughanpartners.com.au