Property investors & developers: the beginners’ tax guide
It’s a big venture buying a rental property or property development – there’s a lot of money at stake and if you don’t research the tax side of it properly, you could be missing out on so much.
This is why we’ve written this tax guide for property investors and developers.
Speaking to several clients who are currently using Sleek investment property accounting services, here’s what they had to say before they utilised our services –
I bought my first property last year and had no idea what records to keep, let alone how to put it all together for my tax return – Sleek changed all this!
I was overwhelmed with all the paperwork and made several mistakes with my first tax return doing it myself – never again! I’m going to continue to use Sleek as they make it so easy from record keeping, completing my tax return, and getting me a good refund.
Depreciation was the hardest part for me. I didn’t know which expenses and items I could depreciate, now I have a schedule to work it out.
Is this you? See, you’re not alone.
Sometimes we all need a little help and it’s worth the cost to use an accountant who can make it so much easier.
This guide is the ultimate tax guide for property investors and developers.
It is a tax guide for the short-term holiday rental of your holiday home, rental properties and for property developers.
You can use this guide before you buy your property so you can calculate if it is a significant opportunity worth pursuing or you can use this guide during the tax year so you can collect your paperwork together ready to claim at the end of the financial year.
To keep it simple and to help you get your head around it, think of your investment property as money coming in – the income from rent – and the money going out – the expenses you have incurred by owning the property.
The key is all about keeping good records. So, this is the time to learn to love paperwork (or love your accountant for loving your paperwork… haha!)
Why is it important to understand taxes involved in property investment?
It helps to determine if your property investment meets your financial goals – and we don’t want you to miss out on the full potential of all tax benefits available at the same time as staying compliant with the tax regulations.
- Buying your property
- Rental income from your investment property
- Tax deductions for property investors
- What are the immediate deductions for property investors?
- What can’t you claim for your investment property
- What are depreciated deductions for property investors?
- Record keeping for property and developers
- Taxes for property investors
- Capital Gains Tax and your investment property
- A few tax tips for property investment
Buying your property
From the very beginning of your property investing journey you must keep records. When you purchase your property or land, you must keep handy, the contract of purchase, all conveyancing documents, any loan documents and borrowing expenses.
This will include all the paperwork associated with the costs to buy the property. This may include the contract of purchase and conveyancing documents, the invoice for building inspection, if you used the services of a buyer’s agent to purchase your property, and any loan documents.
Rental income from your investment property
Let’s start with the income side of your property and development.
So, what is classified as income for property investment? This is any money coming in and can include –
- Rental income received from the property – this could be long-term leases to short-term holiday rentals.
- Any insurance claims – money received from your insurer for insurance claims.
- If you are developing property, your income may not be immediate until you have developed the land, however, you may have leased your land before starting to build or rent the new premises for a few months prior to its sale.
Tax deductions for property investors
Looking at the other side of the equation – what can you claim as expenses for an investment property?
These deductions are broken into two parts – immediate deductions you can claim the whole amount and deductions that are depreciated over time.
What are the immediate deductions for property investors?
Immediate deductions are the expenses you need to make to maintain the property, repairs caused by wear and tear and the administrative costs of managing the property.
Immediate deductions include such expenses as –
- Accountant and bookkeeping fees – all valid expenses when it comes to managing your investment property and can be claimed immediately. This may include tax advice.
- Property maintenance such as plumbing or electrical issues, repairs to and maintenance of the property.
- Utilities – if you are the one paying the utility bills, you are entitled to claim them. If the tenant pays them, you are not able to claim them.
- Cleaning – any cleaning fees you incur whether this is a weekly cleaning service to maintain the property for regular guests or end-of-lease exit cleaning between tenants.
- Gardening costs – if your property has a garden and yard the cost to maintain these areas can be an immediate deduction.
- Interest charges on your loan and bank charges – interest on loans that you have over the property (or the portion if you rent out a part of the property) as well, as any bank charges relating to your investment property.
- Council and body corporate fees – again if you pay these fees, you are entitled to claim them.
- Rental agent fees – for example the fees charged by your agent to manage your rental property or any admin charges.
- Advertising and marketing fees to find a tenant for your property.
- Legal fees – you may need a solicitor to help draw up the lease contract or assist with an eviction notice. But you cannot claim the solicitor fees to purchase the property.
- Property Insurance – any insurance related to the property including fire, flood, contents or landlord insurance.
- Pest control – to protect your property and investment as an income-producing entity.
- Land tax – this is a yearly tax on the value of your land. This is an immediate deduction however, you do need to check as each State and Territory have their own regulations when it comes to claiming land tax on an investment property.
- Phone, office supplies, and internet costs – you need these facilities to maintain your investment property. However, you can only claim the portion that relates to maintaining and managing your investment property.
Sleek scoop – you must keep copies of invoices, receipts and statements to prove all your claimable expenses.
What can’t you claim for your investment property
While the list is long for what you can claim, there are some investment property expenses you can’t claim.
Expenses that cannot be claimed include –
- Stamp duty – this is the cost charged when you purchased the property.
- Loan repayments – you cannot claim the principal sum you borrowed to purchase the investment property (only the interest incurred)
- Any personal expenses when you used the investment property for personal use, including borrowing costs.
- Conveyancer and solicitor fees when purchasing the property.
- Other expenses you paid during the purchase of the property – such as building inspections (check this?)
- Any bills paid by the tenants
- Any repairs or renovations carried out before you tenanted the property.
- Travel expenses incurred to inspect your investment property. This used to be claimable but is now no longer a deductible expense.
- Borrowing costs such as bank establishment fees or title search fees if you borrowed money to purchase the property.
- Some expenses when selling your investment property such as the legal and conveyancing costs, reports, real estate agent fees, and advertising.
What are depreciated deductions for property investors?
So now you are aware of the expenses we can claim as immediate deductions. What are the depreciated expenses you can claim?
Think of investment property depreciation as the general wear and tear that affects the financial value of your property.
And this depreciating value over time is claimable as a rental property deduction.
Let’s explore some of the depreciation costs you can claim on your investment property –
- Building depreciation costs
If your investment property building is no older than 40 years, you can claim the depreciation of the building, at 2.5% per annum.
An example here may help explain this.
Say it costs you $500,000 to build a house as an investment property. In the first year of your ownership, you can claim 2.5% of $500,000. That’s a total of $12,500 as a depreciative expense.
In fact, you can claim $12,500 for every year of your ownership until the house reaches 40 years.
- Capital Works Deductions
Any construction or renovation costs are tax-deductible on your investment property.
These expenses can only be depreciated over several years. They cannot be fully claimed in the year they paid for them, unlike your maintenance costs.
Same as the building depreciation costs, you can generally claim 2.5% of the total cost of the construction or renovation for up to 40 years.
- Plant and Equipment Depreciation
Some items in your investment property can wear and tear over time and the depreciation accounts for this financial loss every year.
These are items over the value of $300, that are removable, are not considered to be permanently attached to the property and replacement is likely to occur in a short period of time.
Some examples of plant and equipment depreciation items include carpet, light and window fittings, showers, air conditioning units, hot water systems, white goods (stovetops and ovens), heat pumps, floating timber flooring, cupboards and furniture.
You must have purchased these assets new (not second-hand or as used assets) and no one else was previously entitled to a deduction for the decline in value of the depreciating asset.
You can depreciate the asset if it was installed for use or used at this property, and you acquired the property within 6 months of it being newly built or substantially renovated.
Record keeping for property and developers
An important aspect for property investors is good record keeping.
Because there is a lot at stake, thousands of dollars coming and going, thorough paperwork and filing is essential.
Besides keeping invoices, receipts and documentation for all your income and expenses, there are other records you need to keep as well –
- Documentation outlining the periods of private use by you or your family and friends of the property
- Records of the periods the property is used as your main residence.
- All loan documents if you refinance the loan for the property
- The efforts made to rent the property out – this may include emails and contracts with your property management agents, communications through holiday rentals sites, and invoices for advertising.
- All capital improvements made to the property – this may include architectural drawings, invoices, and copies of building contracts.
These records are essential as they prove you are engaging as a property investor, and substantiate the claims made through your tax return.
Taxes for property investors
Negative Gearing – what is it?
Negative gearing occurs when an investment property’s tax-deductible expenses involved in renting it out are more than the income you earn from it in a given financial year.
In short, you have made a loss.
Negative gearing is popular among property investors as you can claim a deduction for the shortfall of rental expenses against your other income such as salary, wages or business income.
This can reduce your overall tax bill – YAS!
The injection of funds can also help with the cash flow of your property.
If you are in this situation where your other income is not enough to absorb the loss, you can carry forward your loss to the next financial year.
There are some restrictions on how much you can deduct, so it’s wise to check with your accountant.
So, how do you work out your negative gearing loss? That’s a very good question.
Calculating the negative gearing loss on your investment property
Follow these steps to calculate your negative gearing loss –
- Total your property income – add up the rent collected over the financial year (if you are doing a rough calculation, you can multiply the weekly rent by 52).
- Deduct the total of all your property expenses, as explained in this tax guide.
- Deduct the total depreciation – the loss from the decrease of the building and certain assets within the property (again, this is explained in this tax guide).
Total income less property expenses and less depreciation will return the amount of loss from the investment property.
A good accountant will set up a depreciation schedule for your investment property to make it easier to deduct your depreciation every year.
Positive Gearing – what is it?
While we’re talking about gearing, let’s explore positive gearing.
Positive gearing occurs when an investment property’s tax-deductible expenses involved in renting it out are less than the income you earn from it in a given financial year.
In short, you have made a profit!
This net income from your property investment will be added to your income from wages, salaries, wages, and other investments.
Capital Gains Tax and your investment property
The other tax you need to be aware of is capital gains tax (also shortened to CGT).
A capital gains event occurs when you sell your investment property. Even if you are not selling your investment property, it is important to know about it, as certain timings can seriously affect how much CGT you will pay when it comes to selling your rental property.
What is capital gains tax? Capital Gains Tax is a tax you pay in a financial year from selling an asset such as your investment property.
How much is capital gains tax? If you are an individual, the tax rate is the same as your personal income tax rate for that year.
The net capital gains you made when you sold your investment property will be added to your income and increase your income tax. This could significantly push your income to a higher tax bracket.
Wait. There is a but to this!
If you have a capital gain and you’ve held the property for more than 12 months, and are an Australian resident for tax purposes, you can reduce your capital gain by 50%.
This is called a capital gains tax discount.
A few tax tips for property investment
- Remember, you can’t claim a deduction for expenses for your personal use of the property – this is particularly relevant for holiday homes.
- There are some expenses you can claim a deduction for prior to your property being available for rent. This includes interest on loans. You must acquire these expenses with the intent to rent out the property – and this is where good record-keeping pays for itself.
- Check the ABN details of suppliers whom you contract to do work on your investment property. If they don’t or won’t provide an ABN you may have to withhold 47% from their invoice and transfer that amount to the Australian Taxation Office.
- Do you own an investment property with other people? All expenses and income will automatically be split between the owners on the tax return according to the percentage of ownership. One person will record all the expenses and income on their personal tax return and the other owners will select ‘rent’ as part of their income. The rental property figures will be picked up depending on the percentage of ownership.
- Pay particular attention that you have claimed each expense under the correct expense type to make sure you treat the expense correctly for tax purposes. Another reason for good record-keeping!
- Eligible expenses can only be claimed for the period your property was rented out or on the market.
See, owning an investment property can be straightforward when it comes to tax time. But not everyone may be confident going it alone. And that’s OK.
If this is you and you want to minimise your tax and make sure you’re keeping the right records – open the door to Sleek by calling our office on +61 2 9100 0480. We’re here for all our investors and entrepreneurs.
Check out our accounting services for property investors or use our chat box to ask a question. We’ve got accounting services to keep your rental and property records up to date and help you claim all your expenses on your rental property.