With tax time almost here, a few simple steps now could end up saving you thousands on your investment property. Here are five essential tips to get you started.
1. Add it up
Start by collecting all your receipts and statements, then think about what you may be able to claim as a deduction. That could include:
• Agent’s fees
• Advertising costs
• Body corporate fees
• Capital costs
• Cleaning and maintenance
• Council rates
• Depreciation
• Insurance premiums
• Interest and borrowing expenses
• Repairs
• Travel to and from the property for inspections
• Water charges
2. Claim for depreciation
Make sure you claim any depreciation expenses each year — the cost of the deterioration of fixtures and fittings, such as carpets, built-ins or appliances. You can also claim depreciation on the building if it’s a residential property and it was built after 18 July 1985. Your tax agent can help you complete a tax depreciation report, outlining all the items in your property that are decreasing in value.
3. Consider prepaying interest
In general, interest on an investment loan is tax-deductible — and if you fix the interest rate on all or part of your loan, you may be able to make a payment of interest in advance. By prepaying interest before 30 June 2012, you could claim a deduction this financial year, cutting you tax bill now and perhaps even getting a healthy refund.
4. Don’t forget Capital Gains Tax (CGT).
If you’re thinking about selling an investment property or spending money on improvements, then take a few moments to think about the impact of capital gains tax Unlike your family home, when you sell an investment property, you pay tax on the capital gain — the difference between the selling price and the amount you originally paid for it. The gain is simply added on to your taxable income for the year, then taxed according to the normal income tax scales. You can potentially reduce its impact by:
• Holding on to your property for at least 12 months between buying and selling, so you can take advantage of the 50% CGT discount.
• Selling in a financial year when your income is lower or you’ve sold other assets at a loss, which you can then use to offset your capital gain.
• Taking into account the cost of renovations, improvements and other capital spending on your house. Your capital spending is added to the original purchase price of the house (called the cost base), reducing your gain.
5. Get advice
Our tax system is complex, and everyone’s situation is different. So it’s a good idea to talk to your accountant or tax agent now, so you can be as well as prepared as possible. They can help you take advantage of legitimate concessions while avoiding the pitfalls, so you can start the new financial year in good shape.