We invited Michael Burgess, a director of Chan & Naylor Brisbane, to give us their expert advice on what we should look out for when filing tax returns related to investment properties. Here's the common mistakes they regularly come across.
Chan & Naylor go on to expand their thoughts that although the end of the financial year has gone, investors still have to plan for the upcoming year. It is better to file your tax return early to understand what you can and cannot claim with the help of professionals who can assist you.
Those who put off filing their tax returns often do not get to understand the system. You don't want the ATO to just show up and investigate your books so here are some common tax mistakes in property investment that can be avoided.
Borderless Investing
Investors often mistakenly invest in just one capital city. However, wise investors now employ a strategy called borderless investing wherein they capitalise on different market cycles. This strategy can also reduce land tax liability. You are not subject to land tax until you exceed each state's threshold for the unimproved land value of your rental properties. This means you can enjoy some tax benefits if you spread your investments in different capital city property markets.
Market Rents
Another common mistake is not charging "market rent" to friends and relatives. It can be self-defeating if the property is negatively geared, and can cause you tax problems as well. Remember that deductions are allowed as long as the rent was at a "market" level. If you charge them lower than the market rent, your total allowable deductions will be discounted.
Tax rules allow discounting if you save on your costs, including if the tenant pays by automatic debit and pays for small repairs and maintenance. An agent can help you understand the market, make sure you get the maximum rental yield, legally manage your property, keep your tenant honest and minimise potential issues.
Claiming Depreciation
Remember that you can also claim depreciation. Some investors are not aware of the benefits of claiming depreciation, such as its capacity to improve cash flow. Depreciation can be claimed on the building and on plant and equipment. Some seek to circumvent the CGT system by not claiming depreciation because they do not want to reduce their cost base by the time they sell.
When you sell your property, you have to add back building depreciation to determine the capital gain or loss. You claim these costs at your marginal tax rate but on sale, you get the 50% CGT discount so you pay tax on the discounted part. This means it is better to claim depreciation if you consider the time value of money or that you may not even sell. It may even improve your cash flow and help you hold your property for the long term.
Don't Worry About Interest Rate Forecasts
Lastly, rates often do not increase rapidly and when interest rates rise, it generally means that inflation is increasing and property prices and rents are rising as well. This means investors should not worry and jump at interest rate forecasts, as they often do. Keep in mind that a good debt will give you leverage and an increased asset base, plus compound growth, are the ones that create wealth.