How to Maximise Rental Property Returns
Any amount you can claim on a property will be advantageous to your financial well being. Negative gearing is a popular wealth creation strategy. The net loss can be offset against other income to reduce tax which means the higher you can claim on a property, the bigger the tax benefit. Here are some of the tax deductions you can and cannot claim on negatively geared investments.
Capital gain is derived from the sale of a property where the proceeds are more than the cost base of the property.
There is a capital loss if the proceeds are less than the cost base. To minimise your CGT, you should know all expenses that fall within the property's cost base. You can apply capital losses from the previous year as well.
The cost base consists of the property's purchase price, stamp duty, borrowing expenses, broker fees, legal expenses, capital improvement outlays and auctioneer's fees.
Rental properties bought on or after 19 September 1985 are subject to capital gains tax but any remaining net capital gain can be reduced under the 50% CGT discount for those who owned the property for over 12 months. There are other concessions if it used to be your main residence as well.
You can also claim management expenses against the investment property's income, including insurance, interest on your investment loan, real estate management fees, depreciation on assets, council and water rates, tenancy costs including advertising, repairs and maintenance and cleaning costs. Until 30 June 2017, reasonable travel expenses to maintain, inspect and collect rent for the property may be claimed. For body corporate fees, you can claim admin levies and general purpose sinking funds as well.
To those whose rental property is in their name and not part of a property leasing business, you can reduce your tax on prepaid tax-deductible expenses if the prepayment is for services in the next 12 months. For others, a prepayment may only be deductible immediately if the expenditure is less than $1,000 or specifically required to be incurred by a law.
To claim, you have to present official documentation such as bank statements and receipts and accurate depreciation and capital works schedules.
The depreciation schedule outlines the amount you claim in depreciation every year while the capital works schedule outlines building and construction expenses, costs of altering a building, capital improvements to the surrounding property and how much you can claim every year. Expenses can be written off at 2.5% every year over 40 years for rental properties build after 15 September 1987.
Those who do not have building or construction records can obtain an estimate from a quantity surveyor, clerk of works, experienced builder or supervising architect.
A quantity surveyor can also create a depreciation schedule. They are experienced in valuing assets accurately to help you save money in the long run.
Meanwhile, expenses you cannot claim are those related to your personal use of the property, utility bills paid by the tenant, borrowing costs when you've borrowed against the investment property's equity for private use and those related to the sale or purchase of the property. However, many of these can be part of the cost base. You should document and keep all records of all your spending from the start of your investment.
You should document and keep all records of all your spending from the start of your investment. Talk to your accountant to understand what you need and map out what you want to do in the coming financial year.
For more tips and advice from other industry experts, visit Chan & Naylor website
Chan & Naylor.
Published: 24 July, 2017
This article was originally published on www.chan-naylor.com.au
Disclaimer: If you intend to rely on any of the information in this article to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.