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Four tax tips for landlords

Australians love property, and not just their homes. Many also see investing in property as a great way to build wealth. With the clock ticking down to the end of 2021-22, property investors still have time to make sure they score the maximum deduction possible.

If you’re a landlord, the yearly tax claim is a way of maximising returns. It’s important to claim all you are entitled to, but it’s equally important to get it right.

1) Make sure you have all your paperwork up to date

Every cent you claim must be substantiated by records. Doing this may also reveal some deductions you didn’t know about.

2) Depreciation schedule, get in touch with a quantity surveyor or ask your proeprty manager to arrange this report

Depreciation allows you to claim for the wear and tear over time on most old or new investment properties. Basically, it recognises that the building itself, plus furnishings and fittings, will wear out over time and eventually need to be replaced.

A depreciation schedule contains all the relevant data you, or your accountant, need regarding the compensation for wear and tear of your building and its fittings.

Many investors will find claiming depreciation yields thousands of dollars of deductions a year. You can also claim a deduction for the cost of the depreciation schedule. If you’ve missed out on claiming depreciation, it’s likely you can amend two years’ previous tax returns to rectify this.

3) Consider prepaying interest to claim a deduction

You can prepay interest and other expenses before June 30 to claim the deduction in the 2021-22 year. This is particularly useful if you expect to earn less income next year; maybe you’re going on maternity leave or plan to work less or even retire next financial year.

Loan interest is the biggest tax deduction for property investors, according to the tax office, coming in at an average claim of $9640 for 2018-19. Other expenses you can prepay include the cost of a tax depreciation schedule, strata fees and insurance.

4) Be sure to apportion expenses

If the property is split between self-use and letting, apportion expenses correctly. Examples include holiday homes and renting out part of your home either for a short term or longer term. For example, if your holiday home is genuinely available for rent for nine months of the year (you will need to be able to substantiate it), you can claim three-quarters of the expenses, including mortgage interest, as a deduction.

Other tips

Don’t claim what you’re not entitled to

A common mistake is to claim initial repairs or capital improvements as an immediate deduction. Initial repairs to rectify damage, defects or deterioration that existed at the time of purchasing a property are generally considered capital in nature and not deductible, even if you carried them out to make the property suitable for renting.

Depreciation could be claimed on this expenditure as a capital works deduction over 40 years.

Another mistake is to claim the cost of travel to inspect or maintain your property or collect rent (this was discontinued from July 1, 2017).

And investors who acquired a second-hand residential property on or after May 10, 2017, that contains “previously used” assets can no longer claim depreciation on them (such as ovens, dishwashers and blinds).

You can claim depreciation for any brand-new plant and equipment you purchase and install in the property once it is producing income.

Lastly, during COVID-19 some investors who negatively geared their properties had a real problem with cashflow. In some cases, tenants were unable to pay rent or paying reduced rent. If this case, consider applying to vary your PAYG tax payments downwards so you don’t have to wait until you lodge your annual tax return to score a refund. You need to apply to the ATO to do this and
be careful when you do estimate your taxable income for the year as there can be penalties for underestimating.

Expenses for which you may be entitled to an immediate deduction in the income year you incur them include:
• advertising for tenants
• body corporate fees and charges
• cleaning
• council rates
• gardening and lawn mowing
• insurance (building, contents, public liability)
• interest expenses
• land tax
• pest control
• property agent’s fees and commission
• repairs and maintenance
• water charges
• quantity surveyor schedule

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