Top 5 tax tips for property investors

If you have an investment property or are thinking of purchasing your first one, we have prepared our top 5 tax tips for investors to maximize the benefits of property investment.

1. Choose the right ownership structure

There are several common ownership structures available when considering how to purchase an investment property. We recommend getting advice from a tax expert and/or financial planner to ensure you get it right from the start.

We have outlined the top 5 ownership structures below:

● Personal ownership - You invest under your own name and can use any losses to offset your personal taxable income via negative gearing. It has minimal compliance costs, and when you sell you may be able to access a 50% capital gains tax (CGT) discount. Some pitfalls of this structure include little or no asset protection, and it can be taxed at your marginal tax rate which can be up to 47%.

● Joint ownership: investing jointly with another person. Similar to the personal ownership structure, however, income splitting is available where you can ‘split’ the income to the lesser-earning party to reduce the tax a higher income earner may pay.

● Company ownership: investing via a company structure provides asset protection benefits. It can also be a good option for high-income earners as any profit is taxed at the flat company rate of 30% (or 25% for base rate entities) rather than a personal marginal tax rate up to 47%. However, under this structure, there is no CGT discount, and all profits must be distributed equally among shareholders.

● Trust ownership: property ownership via a family or unit trust is a flexible option that provides asset protection benefits as the property is not held in your personal name. Unlike a company structure, it attracts the 50% CGT discount and income splitting benefits are also available. Disadvantages include that losses cannot be distributed to beneficiaries; therefore, any loss remains trapped within the trust, limiting the advantages of negative gearing. You can review our YouTube video on the pros and cons of trust structures for more information.

● SMSF ownership: Purchasing a property within an SMSF structure can provide tax advantages as rental income on an SMSF property is only taxed at 15%. It also attracts a CGT discount of up to 33%. If you hold the property until after retirement, there is no tax on ongoing rent, or CGT if you sell. However, this ownership method attracts high compliance costs, and you cannot use the property for personal use.

2. Claim depreciation

Depreciation describes the decrease in value of your investment property due to wear and tear over time. It is important to claim depreciation expenses to maximise your return on investment for the property. These expenses are usually split into two categories: capital works and plant and equipment assets. Capital works that are eligible for tax deductions include building renovations, alterations and construction costs related to structural improvement. For properties constructed after 15 September 1987, these expenses are generally allocated over a 40-year period, at a rate of 2.5% per year.

Plant and equipment asset deductions include depreciating assets like light fittings, carpet and other removable fittings and fixtures in your property. The ATO has specific time frames that each item can be claimed for, based on its effective useful life.

To make sure you don't miss any available deductions, we recommend engaging the services of a quantity surveyor who will provide you with a depreciation schedule.

3. Know your deductions

Property investors can minimise tax by claiming eligible expenses on their tax return. Please note, deductions can only be claimed during periods where the property was tenanted or genuinely available for rent. Some examples of deductible expenses include:

● Advertising

● Loan interest

● Insurance premiums

● Maintenance and repairs

● Land tax

● Council rates and strata fees

It is also important to be aware of deductions you can’t claim, these include:

● Travel expenses to inspect investment properties

● Property purchase costs

● Expenses related to personal use of the property

● Expenses paid for by tenants

● Borrowing costs where you borrow against the equity in the property for personal use

4. Prepay your expenses

Property investors can prepay up to 12 months of expenses and claim an immediate deduction. This strategy can be used if you are expecting a lower income in the next financial year and want to offset your higher income in the current financial year. This rule is applicable for expenses less than $1,000, or if they are over $1,000, the service period is 12 months or less. An example is paying a yearly insurance premium in advance.

5. Keep documentation

Property owners must keep accurate records for their rental property. Records must generally be kept for five years from when your tax return is lodged (note that the ATO can go back further if they suspect fraud has occurred!).

Purchase and sale documents including contracts, settlement statements, legal fees and agent commission receipts must also be kept for five years from the date you buy, sell or dispose of your investment property.

If you have any questions about tax and your investment property, please contact the team at Cleverly Accounting for more information.