Tax tips for property investors

Now is the right time to get your affairs in order, to get your tax done. If you resonate with Einstein’s famous quote, you need professional tips and insights about getting the most out of your property investments and return. Rizwan Inayat, the Director at iTrust Tax and Accounting, along with DPN’s Managing Director, Sam Khalil, shed light on common tax questions.

Declaring rental income and expenses

Are you missing out on claiming certain deductions? The ATO considers rental income as taxable income, however, you can claim expenses to reduce this amount, including:

• Property management fees and maintenance costs
• Property depreciation
• Bank fees and loan charges
• Insurances
• Legal costs and land tax

Generally, costs incurred while purchasing your property are considered capital in nature and can only be claimed upon the sale of it. They include:

• Stamp duty
• Legal fees
• Agent fees

The value of depreciation

Depreciation is an important tax deduction available for property investors, allowing you to claim a tax deduction on the wear and tear of an investment property. This valuable deduction doesn’t impact the cash flow of your finances.

With regard to property portfolios, it’s important to note that there’s a significant difference between newly constructed and old properties. Legislation changes in 2017 mean that depreciation deductions for newly constructed properties are generally double that of second-hand properties.

What is capital gains tax?

Capital gains tax is the difference between what it cost you to purchase a property and what you receive upon the sale of it. Therefore, what you make on the sale of an investment property determines the capital gain or loss. You need to report capital gains and losses in your income tax return and pay tax on your capital gains.

It’s important to be strategic in your decision-making from a tax point of view, when you’re considering the sale of your investment. For example, there are discounts available for investors who hold a property for more than a year. Also, selling a property in a year coinciding with lower income affords more benefits. It’s often best to keep your property, in order to use the equity to build your investments.

Negative or positive gearing?

Gearing is essentially borrowing to invest money and it can be negative, positive or neutral. When your rental income exceeds the expenses of your investment, you’re positively geared and vice versa. A negatively geared property investment can be used against your other income for deductions.

Completing a PAYG Tax Withholding Variation reduces tax and improves day to day cash flow. When it comes to negative or positive gearing, it’s crucial to look at your tax strategy from a financial point of view, depending on your situation.

Using a trust

The ownership structure you choose for your investment can have significant implications for your tax return. Trusts are becoming increasingly popular for property investors for tax benefits and estate planning advantages. Two main structures offer both advantages and disadvantages, so always do your homework before setting up a trust.

A discretionary family trust is best for investors earning positive income from investments. This allows you to distribute to beneficiaries on a lower tax bracket, including capital gains tax upon sale. It doesn’t entitle you to the land tax free threshold in NSW, however, this differs in each state.

A unit trust structure may benefit unrelated parties investing together. It’s an effective structure for purchases with self-managed super funds and you do get the land tax free threshold.

Property ownership using a company

Like trusts and SMSF, an investment property can be held by a company. Company ownership offers a different tax status and asset protection benefits. A flat tax rate of 27.5% and its own land tax free threshold helps business owners retain earnings within the company, in order to invest it in building assets.

Who’s on your expert team?

Structure is the most critical element to property investment and results in significant tax savings. Getting the right advice from the beginning, for both tax and loan structures, is the way forward. To get the most out of your property investment and ongoing wealth building strategies, you need an accountant, a mortgage broker, a property strategist and legal support.

It might cost you a little bit more, in the beginning, to get the structuring right via a team with an integrated strategy. However, over time, the cost of not getting it right can be monumental. If you're still resonating with Einstein’s quote, or just starting your journey towards property investment, a professional team paves the way towards wealth building success.