Are you a property investor? If so, it’s important to be aware of the tax implications of your investments. There are a number of things you can do to minimise your tax liability and maximise your profits.
This blog post will discuss some of the most important tax tips for property investors. So, whether you’re just getting started or you’ve been investing for years, be sure to read on!
As a property investor in Australia, staying up-to-date on the latest tax tips and changes is important. This blog post will provide an overview of the key tax tips for property investors in Australia for the financial year.
So whether you’re a first-time investor or you’ve been investing for years, make sure you read on to ensure you’re taking full advantage of the tax breaks available to you!
Tax Advice For Real Estate Investors
If you are an investor in Australian real estate, you should be aware of a few tax recommendations of your property accountant to ensure that you are getting the most out of your investment.
This article on our site will provide you with an outline of the most significant factors to bear in mind when it comes to taxes and investing in real estate. Continue reading if you are eager to get started with your education.
It is vital to make sure that you take advantage of all of the tax benefits that are available to you if you are going to invest in real estate as it may be an excellent method to safeguard your financial future.
Here are some suggestions for lowering the amount of income and capital gains tax that you owe as a result of your investments in real estate: Remember these things as you think about making your next purchase!
It is imperative that you remain current on all of the most recent tax advice and developments if you are one of the numerous people in Australia who own property for the purpose of investment.
This blog post will go over some of the most important details that you need to be aware of in order to maintain compliance with the Tax Office and get the most out of your real estate investments.
Continue reading this article to learn everything you require information on about tax deductions, depreciation, and more!
Declare the Full Income From Investment Properties As Well As Rental Properties
More than 1.8 million people in Australia who own investment homes have seen a disruption in their income as a result of the tight rental limits that the government has placed.
According to Tim Loh, an associate commissioner at the ATO, this indicates that the revenue of owners of investment properties may have decreased because tenants negotiated cheaper rates or waived payments.
Loh encourages the declaration of income from all real estate sources, including rent from sharing a portion of the primary residence and vacation residences, and record keeping regarding the use of lodging share platforms like Airbnb.
As income from rental properties undergoes fluctuations, having a broker who leverages comprehensive mortgage broker tools ensures accurate and optimized income reporting, enhancing your financial clarity and tax positioning.
Avoid Mates’ Rates
Only when the property is actually rented out or legitimately available for rent can investors claim a tax reduction.
This indicates that the Tax Office will investigate claims of complete ownership for properties in which only a portion of the ownership is held.
This includes landlords who charge what are known as mates’ rates rather than market prices and who collect rent for only a portion of the year yet claim payment for the entire year.
Exclude from consideration any homes that are rented out at a reduced rate to relatives or close friends.
This is considered to be a residential rental rather than a business one. The income will still be subject to taxation, but the amount of the deductions you can claim will be limited to an amount equal to the annual rent you have collected. In addition to this, you won’t be able to incur any losses.
If you were counting on the benefits of negative gearing, you would not want that to be the consequence.
Don’t Take Deductions For Recently Bought Properties
According to the comparison website RateCity, the amount of money that is being lent by investors has skyrocketed.
Since May, more than $9 billion in loans have been provided, the greatest amount since June 2015 and more than twice the value in May of last year, when COVID-19 was just getting started.
On the other hand, investors are not permitted to claim deductions for recently acquired rental properties.
It is not possible to make an instant claim for the money spent on repairing damage and faults that were already present at the time of purchase, as well as the costs of remodelling.
These expenditures, on the other hand, can be deducted over the course of a certain number of years or added to the cost base of the property for the purposes of capital gains tax.
Prepare yourself for the Australian Taxation Office (ATO) to check such claims and challenge unsound assertions.
Managing finances effectively involves carefully considering how investment loan features are used. So long as your broker is using the right mortgage broker tools, can provide essential insights and management capabilities to ensure that personal and investment finances are kept distinct for optimal tax positioning.
At the conclusion of the first year of ownership, owners are eligible to begin filing claims.
Avoid Using the Redraw Facilities on Investment Mortgages for Your Own Personal Benefit
The Australian Taxation Office (ATO) is going to monitor redraw facilities on investment mortgages that are being used for personal reasons, such as purchasing a vehicle.
A loan feature known as a redraw facility enables the borrower to withdraw money from the loan even after making further payments.
In addition, you shouldn’t claim an excessive amount of interest expenditures. One example would be if the rental property owners tried to claim borrowing costs on both their primary residence and their investment property.
Avoid Distributing Rental Income Wrongly
It is important not to wrongly divide rental income and expenses among owners. One example of this would be claiming deductions for a property that is owned jointly by only the person who has the larger taxable income rather than claiming them jointly.
Avoid Making Claims About Rentals That Aren’t Actually Available
According to the Australian Taxation Office (ATO), if you own a vacation house but do not rent it out, you are not required to include any information on that property in your tax return until such time as you sell it.
The Tax Office is keeping a watch on the following potential outcomes:
- Properties that are not advertised on a website that is frequently visited by a large number of people.
- Properties that are not maintained in a satisfactory manner.
- Homes advertised as available for rent but with absurd requirements, such as “no children” or “no pets,” attached to them.
- Properties that are unable to attract renters that are reasonable.
The ATO is equipped with advanced data-matching capabilities to verify claims. The amount of data that the ATO currently receives from such a wide variety of sources, not just government entities, is staggering.
Recall That It Is Your Right To Use Your House As Your Place Of Business
According to Loh of the ATO, a record number of people worked from home offices or other temporary workspaces, such as kitchen tables, as a result of COVID-19. This increased the number of persons who claimed expenditures for working from home last year by more than one-third to 4.42 million.
There are three different approaches to calculating the costs of running a home office:
- An all-inclusive claim of 80 cents per hour is feasible when using the temporary shortcut approach, which is accessible throughout the full fiscal year. It pays for expenses associated with working from home, such as a phone and internet connection, gas for heating and cooling, lighting, and office supplies. Those who are applying for the benefit do not require a designated work space but are required to use a diary or timesheet to keep track of the amount of hours they work from home.
- A fixed-rate of 52¢ an hour. This is for folks who have a space that is solely devoted to their business, such as a home office. Consumables for telecommunications, the internet, and computing devices are not included, nor is the depreciation of value associated with technological apparatus. You are only allowed to claim expenses for things that are directly relevant to your job. For instance, claims for internet usage should represent time spent working on the computer at work, not time spent streaming shows on Netflix.
- “Actual cost method”, which means making use of expenses to calculate a deduction on charges for a wide variety of things, ranging from cleaning to computers. This is a more involved process, and it needs meticulous record-keeping of all expenditures.
Don’t Forget Depreciation
Depreciation is the gradual deterioration of an asset or piece of property due to the passage of time. After the interest paid on loans, it is the second-largest tax deduction that owners of investment properties can take.
An investor who spends $750,000 on a property with four bedrooms should anticipate a deduction of more than $16,000 in the first year, with the total deductions over the course of five years coming in somewhere around $67,000.
A pre-owned apartment with two bedrooms and a price tag of $550,000 can still qualify for a first-year depreciation deduction of more than $6500 and a cumulative deduction of over $27,000 over the course of the following five years.
Take Extra Caution With The Records
Maintain precise and up-to-date records of both your income and your expenditures. The information must be retained for a period of five years without being altered in any way and unharmed.
They are required to be either in English or to have an easily accessible translation.
The Australian Taxation Office (ATO) suggests photographing receipts as a precaution against their being misplaced or damaged in any way.
Investment Deductions
You are eligible to take a deduction for the costs you expended in order to obtain income from investments such as interest, dividends, or other types of investment income. However, you are not eligible to take a deduction for exempt dividends or other types of exempt income.
The following are some examples of investments that qualify for tax breaks:
- costs associated with maintaining an account that is used for investment purposes
- interest paid on money borrowed to purchase shares and other similar investments, from which you generate income that can be taxed as interest or dividends.
- payments for ongoing management or retainers, as well as amounts paid for advice due to shifts in the portfolio composition, are examples of costs.
- a share of any additional costs that were incurred in the process of managing your investments, including certain travel expenses, the cost of investing journals, and the cost of borrowing money, if applicable.
If you attend an investment seminar, you are only entitled to claim a deduction for the portion of travel expenses relating to some investment income activities.
Rental Properties
The Australian Taxation Office (ATO) places a continuous emphasis on reviewing rental deductions and matching specifics of claimed income with information obtained from real estate brokers, Stayz, AirBnB, and other suppliers.
If you own multiple rental properties, you are required to submit a multi-property rental schedule along with your individual tax filings.
Ensure that claims for interest expense are accurately calculated, that rental income is fairly distributed among owners, that claims for costs to repair damage and defects that existed at the time of purchase are properly depreciated, and that vacation homes are actually available for rent to prospective tenants.
Instant deductions can be claimed for a variety of costs by landlords of rental properties that are either in the process of being rented out or are prepared for and available for rent. The interest on investment loans, land tax, council and water rates, body corporate charges, repairs and upkeep, and commissions paid to agents are some examples of these types of costs.
Depreciation is a tax write-off that can be claimed by landlords to compensate for the value loss of equipment including stoves, carpets, and hot-water systems. They may also be eligible to claim a deduction for capital works, which are modifications to the structure of the home that are carried out over a period of time (for example, remodelling a bathroom).
Be aware that in recent years, tax deductions for depreciation of residential real estate properties have been restricted to only include expenditures that were really incurred on the purchase of new products. Landlords are unable to depreciate assets that were already present in a property at the time it was purchased after May 9, 2017; however, they are able to depreciate the same asset if they purchase a new (and not used or refurbished) asset. This change applies to properties that were acquired after May 9, 2017.
Deductions for travel expenses incurred by residential landlords in connection with the inspection, maintenance, or collection of rent for a rental property have been eliminated.
COVID-19 has brought to light a variety of tax concerns that landlords and property managers need to take into consideration, including the following:
- deductions for properties occupied by tenants whose income has been negatively impacted as a direct result of COVID-19 and who are either unable to pay their full rent or have temporarily stopped paying it.
- rent discounts for tenants whose income has been negatively impacted by COVID-19, in order to let those tenants continue living in the property.
- receipts that can be counted against the assessment of past rent or a portion of the insurance for unpaid rent
- COVID-19 mandates that interest be deducted from deferred loan repayments for the period in question.
- Cancellation of bookings because of COVID-19 for a property that is typically rented out for short-term lodging but that has also historically been used by the owner for certain of his or her own personal needs.
- The private use of a rental property by the owner (for example, as a vacation house) to isolate themselves during COVID-19 and change the available deductions.
- Due to the low demand for short-term rental properties during COVID-19, changes are being made to the advertising and other fees associated with them.
Even though you can claim deductions for your spending and the property’s depreciation, you could have to make some modifications if you’ve modified the way that you use the property.
It is highly recommended that landlords read the information provided by the ATO on holiday homes, renting out part or all of a property, and holiday apartments located in commercial and residential properties. The ATO also provides factsheets on the following topics:
No Deductions For Vacant Land
The amount of money that can be deducted for owning vacant land has been reduced. The new regulations apply to any charges that were incurred on or after the 1st of July 2019, regardless of when the land was actually possessed.
Corporate tax entities, superannuation plans (other than self-managed superannuation funds), managed investment trusts, public unit trusts, unit trusts, and partnerships with all the members belonging to the aforementioned entity categories are still eligible to deduct expenses for holding costs of unoccupied land.
There are some types of businesses and situations in which it is still possible to claim deductions for undeveloped land.
For instance, in the event that the entity that owns the land is a corporation, if you utilise the land in the operation of a business, or if other extraordinary circumstances are present.
If the expenses of holding land are incurred in the carrying on of a business, such as farming, or in the acquiring or production of assessable revenue, then they continue to be deductible.
The rules can be difficult to understand, and you will need to decide whether or not you are the owner of vacant land, whether or not it satisfies the various standards, and whether or not there are special circumstances.
The Australian Taxation Office (ATO) has developed a flowchart to assist taxpayers in evaluating whether or not they are restricted in their ability to claim deductions for expenses related to unoccupied land.
Gains Or Losses From Cryptocurrencies
Almost one in five Australians currently holds cryptocurrency in their portfolio. If you are now participating in the acquisition or sale of cryptocurrencies or have been involved in either of these activities in the past, you need to be aware of the tax repercussions.
It is possible that you will be required to pay tax on any capital gain you make as a result of the sale of the cryptocurrency. There are other regulations for chain splits, staking incentives, and airdrops. When you exchange one cryptocurrency for another cryptocurrency, for example, you are subject to these laws.
As a result of the ATO’s ability to now match transaction data from digital exchanges, it is more vital than it has ever been to appropriately record any gains or losses incurred through bitcoin trading.Â
If you use cryptocurrencies in a business setting, such as operating your start-up or trading big volumes of bitcoin, you are subject to a different set of rules.
This is why working with a qualified crypto accountant can be a massive time sizer. They understand all the rules and regulations regarding cryptocurrencies. This can save you time and the headache of dealing with complex (and constantly updating) Australian rules around the tax repercussions of cryptocurrencies.
Capital Gains Tax Planning
Because selling an appreciating asset could result in a capital gain, you should choose the timing of the sale very carefully. It is essential to be aware that a capital gains tax liability is incurred not on the asset’s settlement but rather when a contract is entered into for the sale of a CGT asset.
This is of utmost significance in situations in which the beginning of the contractual obligation and its completion straddle the close of the fiscal year.
Under these conditions, it is possible that postponing the sale of the CGT asset until the following year, when other forms of relief, such as a capital loss from the sale of another asset, may be available, is the most prudent course of action from a cash flow point of view.
You should also take precautions to ensure that an eligible asset is held onto for the full duration of the required holding period of twelve months in order to qualify for the capital gains tax discount.
In most cases, individuals who are foreign residents or who are only temporarily residents in Canada are not eligible for the CGT discount.
You should maintain accurate records for all of your investments and keep those records for at least five years after a capital gains tax event has occurred.
Foreign Investments
If you are an Australian resident who also owns assets located outside of the country, you are required to report in your tax return any gains or losses in the value of such overseas assets.
It’s possible that you’ll need to mention the money you make from investments overseas on your tax return as well.
Even though money is being kept in a foreign country for you, you are still able to receive your income. So, for instance, if you obtain foreign income or gains that are taxable in Australia and you paid foreign tax on that money, you may be eligible for an Australian foreign income tax offset.
This is because Australia taxes its residents on a variety of income, including international income and gains.
Be aware that the Australian Taxation Office (ATO) has information sharing agreements with the revenue authorities in many foreign jurisdictions. As a result, the ATO is likely to get data on any overseas investments or income that you have.
The Value Of Depreciation
You are able to claim a tax deduction for the normal wear and tear that occurs on an investment property if you take advantage of depreciation, which is an important tax deduction that is accessible to property investors.
This valuable deduction will not have any effect on the flow of funds via your financial situation.
In the context of real estate investment portfolios, it is essential to recognise that there is a material distinction between properties that have just been built and those that have been around for a long time.
As a result of changes in the law that took effect in 2017, the amount of depreciation that may be claimed for newly built properties is generally equivalent to that of an older property.
What Is Capital Gains Tax?
The difference between the amount that it costs you to purchase a property and the amount that you receive when you sell it is the amount that is subject to capital gains tax.
Therefore, the capital gain or loss is determined by the amount of money that is made from the sale of an investment property.
Because of this, you are required to disclose any gains or losses from the sale of assets on your income tax return and pay tax on any profits from the sale of assets.
When contemplating the purchase or sale of an investment, it is critical to give careful thought to the implications of those choices from a financial and tax perspective.
For instance, investors who keep a property for longer than a year can qualify for savings on their property taxes.
Additionally, there are additional advantages to be had when selling real estate during a year that coincides with a period of decreased income.
It is sometimes to your advantage to keep your property so that you can continue to grow equity in your investment portfolio.
Negative Or Positive Gearing?
The process of borrowing money for the sake of investing can result in either a positive, a negative, or a neutral gearing ratio. When your rental expenses are higher than your income, you are negatively geared, and vice versa.
You are eligible for deductions on your other income if you have a property investment that has a negative gearing ratio.
Increasing your cash flow and lowering your overall tax burden can be accomplished by completing a PAYG Tax Withholding Variation.
Whether you have positive or negative gearing, it is essential to examine your tax strategy from a financial perspective, and the way you do so will vary based on the specifics of your position.
Using A Trust
The ownership structure that you decide to use for your investment can have a considerable impact on the tax return that you file.
As a consequence of this, trusts are gaining popularity among real estate investors due to the tax advantages and the advantages they provide for estate planning.
However, the two primary structures each have their own set of benefits as well as drawbacks; therefore, you should always conduct your research before establishing a trust.
Investors who are able to generate a positive income from their investments may consider establishing a discretionary family trust.
Because of this, you will be able to transfer assets to beneficiaries who are at a lower tax rate, including the tax on capital gains upon sale. In New South Wales, it does not entitle you to the tax-free land threshold; nevertheless, the laws on this vary from state to state.
An arrangement known as a unit trust could be advantageous to unrelated parties investing together. You do receive the land tax free threshold if you use this structure for your acquisitions using self-managed super funds, which makes it an effective arrangement.
