With the end of FY19 fast approaching, it's time to get ready for tax time as a property investor.
Tax legislation is not static and is always changing or being amended, so it literally does pay to know what your tax obligations are and what expenses are claimable. This is essential if you are to maximise the return on your investment.
This year, the big news is around Labor's proposed changes to capital gains tax (CGT) and abolishing negative gearing on existing properties, which could impact property investors and the property sector in a number of ways.
Let's start by taking a look at what information you need to provide so you can be ready for tax time.
Income you must declare
As an investor, you first need to know what your obligations are and what income you need to declare to the Australian Taxation Office (ATO) - specifically the rent and rental-related income your receive from tenants.
Besides the total income from rent, this can also include rental bonds returned to you by tenants who defaults, as well as booking fees received and payments to you by tenants for damage they have caused to the property.
Deductions you can claim as a property investor
So what exactly can you claim as a property investor? According to the ATO, 'You can claim a deduction for your related expenses for the period your property is rented or is available for rent.' These claimable expenses can include:
Repairs to your investment property
The ATO states that you can claim for repairs to your investment property that, 'make good or remedy defects in, damage to or deterioration of the property’. This could be repairs to a leaking roof, faulty door lock or broken window of your investment property.
Management and maintenance costs
There are a range of property management and maintenance costs you can claim for, including costs incurred advertising for new tenants, body corporate fees and charges, cleaning, council rates, water charges, land tax, gardening, pest control, insurance (building, contents, public liability).
You can also claim for any travel expenses incurred directly related to managing your investment property.
Interest on your bank loans and borrowing expenses
You can also claim for any interest on your mortgage, as well as the deposit, stamp duty, and associated legal fees. But again, the ATO only asks that these must be clearly connected with your investment property.
Renovations, repairs and improvements to an investment property
Renovations, such as a bathroom or kitchen remodel, are all classed as capital improvements by the ATO, and are claimed as capital works deductions. If you hire a professional - like an architect - you can also claim their fees, as well as the cost of building permits and council fees.
The only catch with these is that you cannot claim for these in the year you incur them, but are calculated on a sliding scale and deducted over a number of years.
You can also claim for the decline in value of certain assets in your investment property - like flooring, appliances, and hot water systems. Again, the rules around this are complex, but the cost of each item can depreciate over the life of the asset and be claimed as a tax deduction.
For more information on depreciating assets, check out the ATO's website for a variety of resources, or get a tax professional to help you calculate these.
What about capital gains tax (CGT)?
If you've sold your investment property during the financial year, you become liable for capital gains tax (CGT). CGT is assessed in the tax year that the sale of your investment property took place and applies to any profit you make on the sale.
For an idea of your CGT obligation, simply subtract the cost of the property plus all the expenses you have incurred managing it from the sale price - the difference is your capital gain.
Other legislative changes coming in FY19
If you are a property investor or are thinking of buying an investment property, you'll need to keep an eye out on the upcoming Federal election.
If Labor win, they've pledged to overhaul tax concessions - specifically negative gearing and CGT. There is the possibility they'll move to limit negative gearing for new housing from 1 January 2020 and reduce the capital gains tax discount from 50 per cent to 25 per cent from the same date.
However, if the Liberal/Coalition retain power then the status quo regarding tax concessions for property investors is likely to be maintained.
Get help from a tax expert
Tax can be complex to get your head around, especially as the tax legislation is always changing, often every year.
A good place to start is the Australian Taxation Office, who have all the resources to help you make sense of your tax status.
You could also hire an accountant or tax agent to help. The benefit of getting professional advice is that they will be across the latest legislation, and can help you to maximise your claimable deductions.
You must also keep all official documentation including receipts and bank statements that relate to your investment property, so you can prove to the ATO your claim is legitimate.