It’s almost the end of the financial year – which means it’s time to get a move on if you want to get the most out of the taxpayer through your investment property.
But what exactly can you claim? And what strategies can you use to maximise your tax return this year?
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When it comes to maximising your tax return, planning ahead is key.
MISSED OPPORTUNITIES
H&R Block director of Tax Communications Mark Chapman says while most smaller investors understand the main things they can claim, many don’t understand some of the “more technical aspects of property taxation.”
It’s EOFY again – how much do you know about property taxation?
Data from H&R Block shows 4 in 10 respondents have missed something in a previous tax return. Chapman says property investors commonly forgo deductions such as depreciation claims, borrowing expenses, capital works deductions, the tax implications of refinancing and the cost base adjustments for capital gains tax purposes.
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“Many investors also fail to keep adequate records of renovations and improvements undertaken over the years,” Chapman says. “This can become an expensive mistake when the property is sold because they may be unable to substantiate costs that could otherwise reduce their capital gains tax liability.”
He says it’s also common to misunderstand the difference between repairs and improvements which are generally claimed differently.
H&R Block’s Mark Chapman. Picture: Supplied
WHAT CAN YOU CLAIM?
The biggest deduction property investors usually claim is interest on their investment loan, Chapman says. Other deductions investors can claim include: property management fees, council and water rates, Land tax, building and landlord insurance, advertising for tenants, the cost of repairs, the cost of maintenance and Strata fees. The cost of pest control can also be claimed, as can accounting and tax agent fees, depreciation on eligible assets and building structures and borrowing expenses associated with setting up the loan.
Rethink Wealth managing director Patrick Casey says the cost of income protection insurance can also be tax deductible when income protection premiums are paid by personal funds.
Rethink Wealth director Patrick Casey. Picture: Supplied
TAX-SAVVY STRATEGIES
Casey says one way investors can maximise their tax return this financial year is to pre-pay the interest on their loan for the next year.
“The largest single deduction available to investors is the ability to prepay the interest on that loan for the year in advance,” Casey says. “If you think this year that you’re currently in is a particularly high income year or will be higher than what the next financial year is going to be, you can ask the bank to essentially prepay next year’s interest now and claim all of the tax deduction in this current financial year.”
There are several strategies you can consider to help you maximise your return.
While negative gearing changes outlined in this year’s budget won’t really affect what investors are able to claim in this year’s tax cycle, there will be changes next year for those who purchased existing property after budget night, he says.
However, anyone who held an investment property before budget night will be able to continue to claim their prepaid interest costs moving forward, as will those who buy newly built property.
The prepaying strategy can also apply to other costs, including property management fees, council rates and maintenance works, he adds.
Don’t forget about depreciation.
DEPRECIATION
Another major deduction that many investors overlook is depreciation, Casey says. This involves getting a quantity surveyor to complete a tax depreciation schedule, which usually costs a few hundred dollars for a residential property and a few thousand dollars for a commercial property, he says.
“The cost of this is usually tax deductible itself,” he says. “It unlocks quite a few thousands of dollars in legitimate tax deductions over the course of owning the property so it pays for itself many, many times over.”
There are tax strategies that can help to offset against the high gains from a sale. Picture: NCA NewsWire / Gaye Gerard
SUPER CONTRIBUTIONS
Some investors are able to make the most of their unused super contributions caps in the same financial year they realise a capital gain from selling a property.
If a person hasn’t used all of their concessional superannuation contributions over the past five years, there is a potential to bring all five year’s worth forward at once and claim that contribution as a tax deduction. If a person is able to invest some of their capital gains from selling a property into their super, they can then claim that amount as a tax deduction, to reduce their taxable income.
This sort of strategy needs to be planned ahead so that the sale happens early enough for you to access the cash to make the super contributions before the end of the financial year. If you are listing in May, you have left it too late, he says.
Creating a record keeping system from day dot will prevent against EOFY stress. Picture: iStock
RECORD KEEPING
H&R Block director of Tax Communications Mark Chapman says it’s important to keep records for at least five years after lodging your tax return and even longer when it comes to the property’s purchase and capital improvements. He suggests keeping the following:
* Loan statements
* Tax invoices and receipts
* Bank statements
* Insurance documents
* Property management statements
* Depreciation schedules prepared by a quantity surveyor
* Records showing periods when the property was rented or genuinely available for rent
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