10 Common Property Investment Tax Mistakes to Avoid
For many property investors, tax is not exactly the most exciting topic of conversation. However, it’s crucial to understand how tax can be a powerful tool for wealth building in real estate. In fact, when managed correctly, taxes can work in your favor, making property ownership more profitable.
While there are factors you can’t control, like market fluctuations or interest rates, one aspect you can control is how you manage your tax deductions. This control can significantly impact the success of your property investment.
How to Maximize Tax Deductions on Investment Properties
The Australian Taxation Office (ATO) provides detailed guidelines on rental expenses and how they can be claimed. However, to ensure you’re not making tax mistakes, it’s essential to follow two key steps: maintain a depreciation schedule and keep detailed records of your expenses.
Depreciation Schedule
A depreciation schedule is a comprehensive document that lists all the depreciable assets in your property, such as appliances, carpets, and even common areas in apartment complexes. This is not something that should be done casually; a professional service is necessary to create an accurate schedule, and it is tax-deductible too, so it’s worth the investment.
Expense Records
Another common mistake is failing to track every expense throughout the year. For example, if you’ve used funds from a redraw facility to cover property costs, you need to have proper documentation to back up those expenses. You can only claim these amounts if you’ve kept track of every detail.
10 Common Property Investment Tax Mistakes to Avoid
Despite the vast opportunities available for tax deductions, many property investors miss out or make mistakes when filing taxes. Below are 10 of the most common tax errors to be aware of.
1. Not Claiming Enough
You may be surprised by the range of expenses you can claim. For example, small items like smoke alarms, security systems, or even garbage bins can be claimed as tax deductions. The ATO recognizes over 6,000 different depreciable assets, such as carpets, hot water systems, and ceiling fans. Each item has a specific depreciation rate that can benefit you.
2. Assuming Your Property Is Too Old for Depreciation
Just because your property is older doesn’t mean you can’t claim depreciation. Properties built after 1987 can claim capital allowances for structural elements, but you can still claim depreciation on renovations or new assets, such as appliances or flooring, even if the property itself is older.
3. Forgetting Deductions After Renovations
If you’ve renovated the property, remember that both the items removed and the new items added are deductible. For example, if you replaced old tiles with new ones, the cost of both the new and old tiles can be claimed.
4. Thinking Your Return is Final Once Submitted
If you’ve already filed your tax return and realize you missed some deductions, it’s not too late to amend your return. The ATO allows a two-year window to make corrections from the date your notice of assessment is issued.
5. Claiming the Land Purchase Cost
For property development or construction investments, you can’t claim the cost of purchasing the land itself. However, any improvements or structural changes to the land are eligible for tax deductions.
6. Claiming Unqualified Costs
If you do DIY work on your property, you can’t claim the cost of your time or labor. However, the materials you purchase for the job are tax-deductible. Remember, only expenses you actually incur can be claimed.
7. Claiming Personal Interest
If you have a loan that covers both your investment property and personal expenses, such as a car purchase, you can’t claim the interest paid on the personal portion of the loan. Always keep your personal and investment loans separate to avoid this issue.
8. Claiming Travel Costs for Personal Trips
You can only claim travel expenses related to your investment property, such as traveling for inspections or maintenance. Personal travel, even if it’s tied to the property, is not deductible.
9. Misallocating Rental Expenses
If you own a property that you partially use for personal purposes, like a holiday home, you can’t claim deductions for the portion of expenses that relate to personal use. Similarly, if the property is rented to family or friends at below market rates, deductions are limited to the actual rent received.
10. Struggling with Tax Return Preparation
Understanding the complex world of property investment taxes can be challenging. Mistakes made due to a lack of knowledge could result in missed opportunities to claim valuable deductions. Working with a tax professional who specializes in property investment can help you navigate these complexities.
What to Do After You Get Your Tax Refund
Once you’ve claimed all your tax deductions and received your refund, it’s tempting to spend the extra cash. However, a savvy property investor will use the refund to further enhance their portfolio. You can use the refund to reduce your mortgage by putting it in an offset account, thereby decreasing the interest payable.
For example, if you receive $5,000 annually in tax refunds, after 10 years, you could have $50,000 in your offset account. This could significantly reduce the interest you’re paying over time and give you more funds to invest in further properties or upgrades.
Conclusion
Being aware of these common tax mistakes and learning how to maximize your property deductions can help you grow your investment portfolio more effectively. With proper planning and guidance from a tax professional, you can ensure you’re claiming everything you’re entitled to and avoid losing valuable money that could be used to build your wealth.
