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A taxing issue for landlords

I am thinking about buying an investment property and have been told that I should become a tax expert with respect to property as lots of people under-claim their entitlements. Is this so?

The answer is yes and it’s probably likely when landlords or property investors don’t get good advice. The one area where under-claiming is likely to happen is for the fixtures, fittings and furniture that come with a rented home. The ATO allows you to make a depreciation claim based on the ‘useful life’ of those things that come with the house. This covers carpets, heaters, water heaters, curtains or blinds, furniture, etc. The ATO’s website has a list of these common items with their life.

If something costs $1000 and it has a useful life of 10 years, the depreciation value is $100. Some wise landlords get a quantity surveyor to come to the property and they use their trained eye to give you a figure. Most people who have used these professionals say the cost is returned in the first tax return because they know what they can and can’t claim.

You also can claim a building depreciation allowance at 2.5 per cent and this applies to properties where construction started on or after 16 September 1987. One built between 18 July 1985 and 15 September 1987 can claim four per cent for 25 years. This is a depreciation allowance against assessable income and it applies to extensions, alterations and improvements to income producing residential buildings.

You will have to pay land tax and this is based on the unimproved capital value of the land and is levied by state and territory governments.

There will be GST to pay but you won’t be able to claim it as an input tax credit as you don’t charge GST on rent. The GST is a ‘cost’ to the landlord that can’t be claimed.

And as you will receive income over $1000, you will have to pay Pay As You Go tax instalments and this is where an accountant can be useful to explain the details. This is a bigger issue when your property is positively geared and you are not making losses.

And that’s another tax point. If the outgoings – interest, agent fees, legal costs, etc. – are greater than income and you make a loss, this can be deducted off your other income to reduce your total taxable income, reducing your tax bill. You can take this as one big credit with your annual tax return, which could result in a nice cheque from the ATO, or you can talk to your paymasters and get the credit with your weekly, fortnightly or monthly pay. This helps with your cash flow to meet the losses on the property each month.

If you get the adjustment wrong, you will have to make it up to the Tax Office and there should be penalties/interest to pay as well. This is another area to talk to your accountant about but it’s a good deal.

Finally, if you sell the place, there will be capital gains tax if you sell it at a profit. Your family home is capital gains tax-free but as you have received income and made tax claims with your investment property, you then have to cough up a capital gains tax. The above explanations show why you need to become a tax expert when you become a landlord.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, August 27, 2010

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