PRESS RELEASE: Can property investing can help you outsmart the ATO?

The costs involved with property investing can feel daunting, but Australia has tax rules that allow you to offset your expenses and reduce your annual tax bill.

Before we start, I have a couple of things to point out. Firstly, this article is not so much about outsmarting the tax office as ensuring you are aware of what’s deductible so you can legally minimise the tax you pay. Also, this is general rather than personal advice.

With that in mind, here are a few of the best ways to make your investment property work for you at tax time.

Negative gearing

Negative gearing is a gift to property investors but can be tricky to understand. Here’s a breakdown of how it works.

– What is negative gearing?

When your property is negatively geared, the money you must pay to own and maintain it is greater than the income it makes.

Sounds counterintuitive, doesn’t it? Why would you want to be losing money on an investment?

It turns out there are a few good reasons.

– Why use negative gearing?

Applying negative gearing to your investment property allows you to offset your income at tax time to lower your tax debt. Because loss on an investment property is tax deductible, you can use this to reduce your taxable income, thus lowering your tax liability.

Here’s a basic example:

If you rent out a property for $700 a week ($36,400 a year), but the expenses of maintaining the property and paying the mortgage add up to $1,000 a week ($52,000 a year), then you are suffering a loss of $15,600 annually.

If your work income is $100,000 annually, you can subtract $15,600 from that income to reduce it to $84,400.

– When to choose negative gearing

Negative gearing is best used if you plan to sell your investment property in the long term and reap profits.

People who choose to gear positively have a low enough mortgage and earn enough rent that they are profiting on their ownership of the property. As a result, they will pay tax on this additional income.

– The risks of negative gearing

Despite the long-term goal, negative gearing still means taking an economic loss throughout the year. If you’re choosing this strategy, you need to make sure you can cover the day-to-day costs of your investment, especially if something happens and you can’t find tenants to pay rent. It’s also essential to buy strategically and ensure the loss you make. At the same time, you own the property, which is eventually offset by the profits you earn when you sell (minus capital gains tax, but that’s a topic for another day).

Tax deductible property investing expenses

Many investment property owners fail to take advantage of the complete list of tax-deductible expenses. At tax time, you need to have everything documented so you can include all the relevant costs in your return:

The ATO lists these as deductions for your rental property:

– Advertising for tenants
– Body corporate administrative fund charges
– Council rates, water charges, land tax
– Cleaning, gardening, and lawn mowing
– Pest control
– Insurance (building, contents, public liability, loss of rent)
– Interest expenses
– Prepaid expenses
– Property agent’s fees and commission
– Repairs and maintenance
– Legal expenses
– Body corporate fees

Another thing to remember is that you should be able to claim depreciation.

Depreciation is when the structure or assets of your investment property lose value due to time, wear, and tear. Think of things like the carpet and blinds on the windows, which will eventually need to be replaced. Claiming depreciation is slightly more complex. It’s best to sit down with your tax accountant to discuss what you can claim under depreciation. You’ll need a ‘depreciation schedule’, which breaks down a list of items in the property that depreciate. This only needs to be created once and can be used for several years.

Talk to your tax accountant.

Owning an investment property makes tax time more complex. Work with your property manager to keep accurate records and share these with an experienced tax accountant. Your accountant will ask the right questions and apply the correct deductions to reduce your annual tax bill; you may even find you are in line for a refund.

Do you need help clarifying your investment property expenses so you can reduce tax? Contact Tax Integrity today.