Tax tips every investor should follow

With these tips tax you are sure to avoid some key mistakes

If you’re serious about investing in property, you need to be a tax smart. In fact, the Australian Taxation Office (ATO) has identified a number of common mistakes property investors make.

The first mistake is not keeping track of tax deductions such as interest, insurance, real estate agent management fees, and depreciation. Property owners need to keep proof of all their income-related expenses from the beginning.

“Keep documentation,” stresses Stella Poly, principal accountant based in Melbourne. “Write everything down. Keep tract of renovation costs. If you live in the property, then rent it out, and later return to the property, keep track of the dates. If you don’t write everything down you can miss out on deductions. Even small amounts add up over time.”

Stella’s other tax tips include:

Getting Market Valuations

Keep in mind, renting out your property, improving or repairing your property, subdividing your property, and/or operating a home office or business can all affect your taxes.

“When you change the nature of the property, for example you rent it out or renovate it, it’s important to get a market valuation of the property at that time,” Stella advices.

Using Discretionary Family Trust

A discretionary family trust can give investors flexibility in distributing profit or income from a property. Since the trust allows you to share the tax burden among family members and helps protect family assets, it can be useful if your family holds capital growth or income-generating assets.

As the name infers, the trustee has discretion in determining which beneficiary will benefit from the trust. This trust has clear advantages where there is a disparity in the income of the beneficiaries; it allows you to reduce your tax bill by distributing income to family members with lower taxable income. If you choose to use a discretionary family trust, seek financial advice from an experienced accountant.

Negatively-Geared Properties

A significant number of investment properties in Australia are negatively geared- a tax strategy where investors make a net loss on their property which can be claimed against their other income to lower the amount of tax they pay.

“Keep in mind, negative gearing gives you the option of claiming depreciation, but it increases chances of capital gains later when you decide to sell,” Stella cautions.

Depreciation Schedules

Some investors do not claim as much as they were entitled to because they didn’t have a depreciation schedule. The calculation of depreciable items is very specialized and should be carried out by a qualified professional. However, the cost of a depreciation schedule is not always warranted.

“If a property has had a major refurbishment or is of great value, say $400,000 or more, this is something you should consider,” says Stella. “But if the property is more than 25 years old, you lose the benefits of depreciation and the cost of getting a depreciation schedule may not be warranted.”

Tax considerations form a large part of any successful property investment strategy. For property owners and investors, working with professionals such as an accountant, financial planner, or conveyancer can help streamline your strategy and help you take full advantage of any eligible tax deductions.

Do you have any tax questions?

Jane Min Zhang from LJR Australia Pty Ltd, has put together a 15 page report titled “The top 10 Questions Property Investors ask their Accountants” valued at $49.95 if you’d like a copy go to our Property Professionals Network and click on Jane’s page to find out how you can get your free copy.