In 2021 Tax Tips

Tax Tips For Real Estate Investors

As a real estate investor in Australia, you have to deal with a lot of taxes. This article will provide some tips for saving money on your tax bill. 

Income from all sources is taxable in Australia and includes income from property rentals, investing in shares or any other investment vehicle, interest earned on savings accounts and also capital gains made when selling assets such as stocks or property. 

In addition to income taxes that are payable by individuals, companies may incur corporate tax obligations, which vary according to the entity’s legal structure (for example, an Australian company pays 30% corporate tax). If you’re not sure what applies to your situation, then get help! Remember that it’s better to do something than nothing at all.

Taxes are one of the most important things to consider when you invest in real estate. Many different tax laws apply to property investments, depending on how you own your investment and what type of property it is.  For example, there are federal income taxes for profits from selling a home or other personal residence. 

You may also be subject to state income taxes if you live in a state where the profit from selling your home is taxable. Whether or not capital gains are taxed varies by which country they’re made in.

EOFY 2021: Property Tax Tips For Real Estate Investors

Lockdowns and flexible working arrangements pushed many Australian workers to temporarily relocate to the regions in 2020, with some setting up base in their investment properties usually leased out as holiday accommodation. The ATO said it will be watching for people lodging incorrect claims for rental property-related expenses.

“When you use your property privately, even if it’s in a period when you can’t rent it out, that becomes a private expense, so all your deductions for the property are no longer claimable,” ATO Assistant Commissioner Adam O’Grady said.

“What you need to do as an investor is keep records of when you are using the property yourself, of even if you’re lending it out to family and friends for either no rent or really low rent, then you need to take those expenses off your return for that period,” Mr O’Grady said.

International border closures have also driven demand for domestic holidays. As a result, the tax office has warned that any money earned through short-term rentals must be included in tax returns and matched against data gathered from accommodation sites like Airbnb.

ATO Cracking Down On Capital Gains

Surging asset prices have also put capital gains in the spotlight, according to accounting firm H&R Block.

“Australians who have done well on the share market, with property or even with Bitcoin during the past year face being audited if they get their returns wrong,” H&R Block’s director of tax communication, Mark Chapman, said.

“Australians can face a 25% penalty for carelessly miscalculating how much they earned from shares, investment properties, and now cryptocurrency,” he said.

Working From Home

According to the Australian Bureau of Statistics, working-related expenses will also be under heavy scrutiny, with two in five people still working from home at least once a day a week.

People lodging regular car and travel claims as well as significant working-from-home expenses will raise a red flag.

The ATO said what’s known as the temporary shortcut method is available to those claiming working from home deductions this year.

Last year, the shortcut method was created at the height of the pandemic to deal with the surge in makeshift home workspaces. It allows claims at a rate of 80 cents per work hour at home, rather than needing to do complex calculations for specific items.

Mr Chapman said that’s not always the best method for workers.

“If you use the 80 cents per hour method, you can make no other claims in relation to working from home. So, items like mobile phone and internet usage are included in the 80 cent rate,” he said.

“Your tax agent will be able to give you advise on which method to use.”

The biggest ‘no-go’ expenses while working from home

  • Personal expenses like coffee, tea and toilet paper;
  • Expenses related to your child’s education, such as online learning courses or laptops;
  • Large expenses up-front – any asset that costs more than $300 should be spread out over a number of years;
  • Employees generally can’t claim occupancy expenses such as rent, mortgage interest, property insurance, land taxes and rates. If you claim occupancy expenses, you may have to pay capital gains tax when you sell your home, even if it is your main residence.

Landlords Impacted By Rent Reductions

After a challenging year for landlords, the ATO said investors can continue to claim expenses as normal on properties that have faced rental reductions or mortgage holidays.

“You can continue to claim all those deductions, such as bank interest on the loan for the property, rates, all those sorts of things. So continue to deduct them as normal,” Mr O’Grady said.

Landlords only need to declare the rent as income once it is paid. So, for example, if payments by your tenants are deferred until the next financial year, you do not need to include these payments until you receive them.

“If your tenants haven’t paid for a couple of months, then in August, they give you three months’ worth of rent as a back payment you just report that income for that particular month,” Mr O’Grady said.

Key areas of focus for the ATO for EOFY 2021:

  • Capital gains from selling property, shares and cryptocurrencies;
  • Incorrect work-related expenses, such as claiming personal expenses or copying last year’s deductions despite changed work conditions;
  • Incorrectly claiming expenses for rental properties when they’ve been using the properties themselves;
  • Failing to declare all income earned from short-term accommodation.

Tax Tips For Property Investors

When claimed correctly, investors can recoup a considerable amount on their properties at tax time on costs like rental expenses, mortgage interest and legal fees.

Property depreciation can also be overlooked by many investors.

According to BMT Tax Depreciation, 80% of property investors fail to take full advantage of property depreciation, potentially missing out on thousands of dollars.

Another significant deduction investors can claim is the interest on their loan. However, there are some rules around this:

  • The property must have been rented out or genuinely available for rent in the same year you claim a deduction;
  • If the property was used for private purposes at any point over the year, you aren’t allowed to claim for that period;
  • If you use some of the loan money for personal use, such as buying a boat or going on a holiday, you can’t claim the interest on that part of the loan. You can only claim the part of the interest that relates to the rental property.

Prove It With Records

The ATO said the number one cause of disallowed claims is a lack of receipts or other documents to support a claim. Remember, if you can’t prove it, you can’t claim it.

While no penalties will apply for taxpayers who amend their returns due to genuine mistakes, those who deliberately over-claim can face penalties of up to 75% of the claim.

Tips For Real Estate Investors At EOFY

With a range of tax incentives still available on investment properties, the end of a financial year can be a rewarding time for property investors. So we give you our top tips for 30 June.

Prepay Your Interest

Your lender may let you pay your investment property home loan interest in advance, especially if you have a fixed-rate loan. That means you can push next financial year’s interest payments into this year and then claim them as a deduction on your tax return.

While this requires you to have the funds upfront, it could also potentially lead to a considerable reduction in your income for tax purposes. That’s particularly true if you earn a high income and have a substantial loan on your investment property.

Claim Depreciation

Property investors can deduct depreciation on their property – that is, the annual decline in the value of the building’s structure, permanent fixtures and plant and equipment. This may include, for instance, the annual fall in the value of items such as ovens, washing machines, carpets and blinds.

You can claim interest on all qualifying depreciating items on investment properties purchased after 7.30 pm on 9 May 2017. However, you can only claim depreciation on new items for investment properties where the contract was entered into after then.

To make your claim, you’ll need a depreciation schedule. You could draw this up yourself, but it’s often a wiser approach to have it done by a quantity surveyor.

Claim Your Borrowing Expenses

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Did you know many of the costs associated with taking out your home loan are also tax-deductible? This includes lenders mortgage insurance (LMI), as well as any loan establishment fees, valuation fees, mortgage broker fees and even any stamp duty you needed to pay on the mortgage itself. (This is different too – and usually much less substantial than –  the stamp duty you paid on the property.)

So, if you’ve taken out a loan to purchase an investment property this financial year – or even if you’ve refinanced the loan on your existing investment property – be sure to make the most of this tax deduction.

Lodge a PAYG Withholding Variation

Most property investors, even those who are negatively geared, tend to pay the interest on their home loans when it falls due but then wait until the end of the financial year to claim it as a tax deduction. This can cause substantial problems with cash flow.

So if you find yourself in this position, you could consider applying to the ATO for a PAYG withholding variation.

A PAYG withholding variation lets you adjust the amount of PAYG you pay throughout the year so that you can effectively receive your tax deductions as they arise instead of having to wait to be reimbursed. However, if you adjust your PAYG too far downwards, you may find yourself having to reimburse the ATO when you lodge your tax return.

Time Any Capital Gains Tax Events Right

If you plan on selling an investment property, you have to pay capital gains tax (CGT) on any profit you make. This means your profit will be treated as income and taxed at your marginal tax rate (ie the top rate you pay).

Generally, that CGT will be payable based on your income in the tax year you exchange contracts. However, if you want to keep your taxable income down this financial year, you could consider pushing the exchange into July so that your profit is assessed against next year’s income. Again, talk to your accountant for specific advice on your own circumstances.

And remember, you’ll receive a discount of 50% on any capital gain made on investment properties you hold for longer than 12 months.

Hold Onto Your Receipts

The ATO treats your receipts as verification that you’ve spent the money you claimed, so it’s important you hold onto them. Otherwise, you may be denying yourself legitimate deductions if the ATO ever investigates your records.

Get Good Advice

The rules governing investment property deductions are complicated and sometimes downright confusing.

More than ever before, it’s important that you get good advice from your accountant or financial planner on what you can and can’t claim, as well as on structuring your investment for maximum effect.

Tax Tips For Investors

1.Pre pay your interest

Pre paying interest for the year ahead may be an option to property owners (subject to the conditions of your lender), in particular if you have a fixed rate loan. The benefit of pre-paying the interest means you can push next financial year’s interest payments into this year and then claim it back as a deduction on your tax return for this year.

You will need to have the funds upfront, however this could potentially lead to a reduction in your taxable income. This is particularly beneficial if you are on a high income and have a large loan. It could mean a substantial saving.

2. Claim depreciation

Depreciation is a key element of your investment property strategy. While depreciation tax breaks are higher on newer properties, they’re also available for older/existing properties.

rental property depreciation schedule is a report that clearly details the tax deductions a property investor can claim for the annual depreciation of their investment property (building, fixtures and assets).

Rental property depreciation schedules assist investors to claim the maximum tax deductions available for the annual depreciation of their investment property (referred to as capital allowance and depreciation by the ATO).
Annual deductions are typically in the thousands of dollars every year, for up to 40 years.

Specifically, a depreciation schedule will:

  • ensure that your claims for capital allowance in accordance with ATO legislation;
  • save you time and effort in trying to calculate these deductions for yourself;
  • save you money with your accountant, as they simply apply the results from the schedule;
  • ensure that your deductions are maximised to create the greatest cash flow result for your investment.

If you need help in sourcing a depreciation schedule, we highly recommend BMT Tax Depreciation Quantity Surveyors.

3. Claim expenses

Many rental property expenses often go unclaimed. The most forgotten deductions are: bank fees, gardening and lawn mowing, pest control, property management fees, travel and car expenses for rent collection.

You can also claim your borrowing expenses – this includes lenders mortgage insurance (LMI), as well as any loan establishment fees, valuation fees, mortgage broker fees and even any stamp duty you needed to pay on the mortgage itself.
So, if you’ve taken out a loan to purchase an investment property this financial year – or even if you’ve refinanced the loan on your existing investment property – be sure to make the most of this tax deduction.

More than ever before it’s important that you get good advice from your accountant or financial planner on what you can and can’t claim, as well as on structuring your investment for maximum effect.

4. Hold on to your receipts

Your receipts will be used by the ATO to verify the money you’ve spent so make sure you keep them on hand. Everything you spend on your investment property should be recorded to allow for maximum deductions.

5. Time any Capital Gains Tax events right

If you plan on selling an investment property, you may have to pay capital gains tax (CGT) on any profit you make. This means your profit will be treated as income and taxed at your marginal tax rate.

Generally speaking, you will receive a discount of 50% on any capital gain you made on investment properties you hold for longer than 12 months. The CGT payable will be based on your income in the tax year you exchange contracts.  If you want to keep your taxable income down this financial year, you could consider pushing exchange into July so that your profit is assessed against next year’s income
Make sure you speak with your accountant about your specific circumstances.

Getting the right advice is key to making smart choices about your investment properties.

The combination of a great property manager and savvy accountant, are as we refer to as the “Dream Team” could save you thousands of dollars every year.

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