Each year, the Australian Taxation Department (ATO) focuses on one particular tax area. This year, it’s all about personal deductions, which include those you claim against your investment property.
In this 2 Minute Accountant episode, I’ll give you some investment property tax tips on how to easily and efficiently keep track of all your expenses and receipts.
Let’s get right to it!
1. Two types of Investment property expenses
There are two types of expenses when it comes to your investment property:
- Capital expenses are the costs of purchasing fixed or long-term assets. You need to write these expenses off over a period of time. A capital expense can be a carpet, for example, that will last for 1-12 years.
- The other expenses are the day-to-day things you need to fix on your investment property. You can write off these expenses in a particular year.
Remember to classify these as two different expenses.
Tip: The most important thing to remember for your investment property expenses is to keep a copy of all your receipts. The ATO requires you to have them to prove any deductions you claim on your investment property.
The most important thing to remember for your investment property expenses is to keep a copy of all your receipts. The ATO requires you to have them to prove any deductions you claim on your investment property.
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NOTE: There are some expenses for which you are not able to claim deductions. For example, expenses not actually incurred by you, such as water or electricity usage charges borne by your tenants. To read further details, see the ATO’s Rental Properties Guide 2017.
2. Deductible expenses for negative gearing
There has been a lot of talks recently about negative gearing. Negative gearing refers to a situation where you’re borrowing money to buy an investment and the interest you’re paying in the loan is greater than your income.
According to the ATO:
“The overall tax result of a negatively geared property is a net rental loss. In this case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income – such as salary, wages or business income – when you complete your tax return for the relevant income year. Where the other income is not sufficient to absorb the loss it’s carried forward to the next income year.”
In other words, you’re making a loss on your investment property that you can offset against your income. Whether that works for you or not depends on your particular situation.
How does it work?
If I earn $100,000 and I make $1 loss on my property, then I’m not going to get taxed $100,000 anymore, but on $99,999.
Keep in mind
You can utilise negative gearing to move the loss across the PAYG (Pay As You Go) income. How? By taking care of all your expenses on time.
Here’s an example:
Let’s say you want to get a new roof on your investment property but the old roof was tin and the new roof is tile.
Is it a replacement or a capital improvement?
The tax law says that if you make a property improvement that replaces the existing infrastructure, on exactly the same sort of material, that’s a replacement.
However, if you change the type of material of your structure, it can be considered a capital improvement, which means it will be taxed differently.
Before you spend any money on a property improvement, talk to your accountant first.
Tip: The Tax Department offers an updated guide on rental properties each year. Get yours here.
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If you have any questions about what you can claim as a deduction on your investment property, or if you’re after some great tips on how to efficiently keep track of all your recipes, I can assist you in finding the right solutions for you and your business. Let’s get in touch today!