With the potential for long-term wealth and future financial stability, the advantages of owning an investment property attract many to the world of real estate. If you’re in this fortunate position, it’s important not to take your eye off the ball - especially when the end of the tax year rolls around!
For investment property owners, June 30th is one of the busiest times of the financial calendar. Being prepared and understanding what you need to do before this date will ensure your tax claim is managed effectively and that you can maximise the benefits of this crucial monetary period.
Here at BOQ, we want to help our customers understand the things they may not be familiar with to ensure they’re making decisions that are in their best interests. That’s why we’ve compiled a list of the key things you need to keep on your radar come the end of the tax year.
Stay on top of property maintenance and repairs
Many of us believe undergoing property maintenance is simply the cost of being a good landlord, but there are real tax benefits associated with ensuring your property is liveable as well.
If throughout the year you have spent money on property maintenance such as cleaning, gardening, pest control and repairing structures, you can claim against them.
However, there are a few things to know before claiming a deduction. Some deductions you can claim immediately, others over a number of years. The difference is between what’s considered as repair and maintenance, and things that fall under the ‘capital improvements’ umbrella. For example, paying to fix part of a fence that was damaged in a storm classes as a repair. Installing a solar panel, however, adds something new to the home, and therefore is classed as an improvement.
Improvements that don’t have an infinite lifespan are known as depreciating assets. Solar panels fall into this category, with the Australian Taxation Office (ATO) estimating that the average system has an effective lifespan of 20 years.
Investment property owners can claim for an income tax deduction for the costs associated with repairing and maintaining a rental property in the year they are paid for. Improvements, such as solar panels that have a depreciation value, need to be claimed over a number of years. A quantity surveyor can help you complete a comprehensive capital allowances and tax depreciation schedule which will ensure you’re on top of everything - something we’ll touch on later.
Plan your depreciation schedule in advance
As an investment property owner, you don’t just own the bricks and mortar, but everything that’s inside it too. From carpets to the oven, window treatments to hot-water systems, the list of assets an occupier is responsible for is endless.
As tenants use these assets, they’ll naturally experience wear and tear. Therefore, over a number of years, a fixture’s appearance and effectiveness will not equal what it was on day one. As such, its value declines and it becomes known as a depreciation asset - much like the solar panel example we used earlier on.
The ATO understands there’s not much investment property owners can do about wear and tear... This is why it allows people to claim a depreciating asset’s decline in value back as a deduction over a number of years - typically the effective lifespan of a product.
In a lot of cases, property owners can work out a product’s effective lifespan themselves, or use the ATO’s own effective lifespan table to see if estimations add up. It’s important to note that as of July 1, 2017, investment property owners can no longer claim a deduction for the decline in value of depreciating assets they bought second hand.
A depreciation schedule is a handy one-stop shop for depreciating assets and their deduction rates. It makes sure that each year you know exactly what has depreciated and what depreciation amount to include in your claims. Depending on the level of depreciation, this can mean hundreds or even thousands of dollars of savings over the life of a property.
Getting this completed and submitted before the end of the tax year means you can get the money right away, without having to wait another 12 months!
Refinance to an Interest Prepaid Home Loan
Interest and insurance are two expenses that can also be claimed, much like a damaged gutter or a broken roof tile.
This is because these costs are associated directly with earning investment income. The ATO also lets you claim back some expenses that have been prepaid. This can be especially useful if you have a lump sum of money that is currently being utilised. Often, prepaying your expenses such as interest on your mortgage or your insurance premiums can earn you a discount along with being one less thing to worry about during the year.
Here at BOQ, we offer a one-year fixed prepaid home loan. This lets you lock in an interest rate and pay the interest associated with your mortgage ahead of time. As outlined above, the ATO may let you claim this at the end of the current tax year. This may remove some risk of interest rate rises and thus interest repayments on your mortgage.
We understand that the end of the tax year can be a stressful time for anyone, especially those in the investment property business. That’s why we work hard to help our customers understand important things they may not be familiar with to ensure they’re making decisions in their best interests.
For more information, why not pop into your local BOQ branch at chat with one of our property banking experts?