Calculators… on your marks. Now’s the time that many serious real estate investors are finalising and sending off their tax returns – if they haven’t already – and hoping to receive a handy tax refund within weeks.
Australian Taxation Office data suggests two-thirds of Australia’s 1.8 million rental property owners report a tax loss on their properties – with those losses totalling more than $13 billion nationally.
While property investment is a marathon and not a sprint, at this time of year it can be financially worthwhile being quick off the blocks. However, sometimes it resembles an obstacle course that can trip up the unwary.
The ATO uses advanced data matching technology to check that investors are not lying or over-claiming in their tax returns. But nobody tells you if you have under-claimed, which is effectively donating your money to the government, so it pays to seek expert advice from a quantity surveyor, accountant or both.
Here are some obstacles that can trip up property investors at tax time:
REPAIRS VERSUS IMPROVEMENTS: A common mistake is to try to claim an improvement to a property as repairs and maintenance and book an immediate tax deduction. In fact, they are capital works deductions and must be claimed over several years.
DEPRECIATION: Everything in an investment property loses value, except the land component. Investors can write down things from carpets to curtains to hot water systems, and it’s a great idea to get help with this from a quantity surveyor. Their depreciation reports cost about $600, which is tax-deductible itself but will most likely save you thousands.
BUILDING COST: Forgetting to write down the value of the building cost can mean missing out on thousands of dollars. Buildings can usually be written off over 40 years, at a rate of 2.5 per cent a year, so a $200,000 building delivers a deduction of $5000 a year, and it doesn’t strip one cent from your pocket.
TRAVEL EXPENSES: The ATO says a common mistake is to claim a tax deduction for travel costs to visit a property when the main purpose of the trip is to have a holiday. You may only be able to claim expenses directly related to the property inspection and a proportion of accommodation costs, it says.
CHASING A LOSS: Tax losses can deliver a nice windfall, but the aim of all property investment should be to earn more income than you pay in expenses. A tax loss is still a loss that is costing you money. Aim for profit, eventually, and in the meantime claim all you are legally entitled to.
It can be a tricky obstacle course, but unlike that crazy steeplechase event that causes soggy shoes, tax time doesn’t have to be uncomfortable.
In fact, many investors will find it to be their favourite time of the year.