Some things only happen once a year. Christmas, Easter, birthdays and of course, tax time. And just like gift shopping, you should never leave your tax paperwork till the last minute, especially if you have a more complex tax situation or investment properties. Staying on top of your admin and filing documents and receipts throughout the year ensures tax time is stress and hassle free.
Our top tips include:
1. Keep documents of everything.
You’ll need to show proof of rental income and expenses. This includes everything from rental bond returns, insurance payouts, and letting and booking fees – anything that generates an income.
The amount you profited from your investment property will be added to your taxable income – so make sure you have all bank statements showing interest too. The more proof you have filed away, the less stressful tax time will be.
2. Set a realistic rental price.
It’s easy to be biased and believe your investment property is worth top rental dollar, especially when you’ve invested your hard-earned cash into its mortgage.
However, it’s your obligation to set a fair and realistic rental price based on your property’s location, size and the current rental market. Intentionally setting an exorbitant rental fee to cover the full repayments, or failing to advertise the property could get you into a lot of trouble with the taxman.
On the flip side, you need to be careful with ‘mates rates’ too. Sure, it’d be nice to offer friends a discounted rental rate, but it can limit the deductions you can claim. Let’s say you lease the property to family members at half the market rate, you must then divide your deduction claims in half.
Failing to genuinely lease out and advertise your investment property, and claiming deductions that don’t match your rental income will result in hefty penalties, unexpected tax charges and a place on the ATO’s ‘naughty’ list.
3. See what you can (and can’t) claim on your holiday home.
A holiday rental property can be a smart investment – and who doesn’t love the idea of owning a beach house? However, just because you pay fortnightly or monthly mortgage repayments, you are only eligible for rental tax deductions when the home is advertised and available for rent, and when it is rented out.
If your holiday house is used for personal or family breaks, or you lend it to friends at no cost, you cannot claim for those periods. Remember – the ATO will need to see proof of income and the associated deductions (e.g. cleaning costs, maintenance and advertising fees) – so don’t try and cheat the system.
4. Know when to claim interest on your loan.
One of the big perks of investing in property is that you can claim the interest charged on the home loan or a portion of the interest as a deduction.
So, to make tax time a whole lot easier, file all loan statements as they clearly show the interest accrued (lenders should also send you an annual statement). But remember, you can only claim interest for periods when the house was leased, and you were generating rental income.
5. Make the most of your deductions.
To maximise your tax return, don’t forget about all the other expenses you can claim. The most common being:
- Real estate management fees.
- Property advertising fees.
- Renters' insurance.
- Council and water rates.
- Travel expenses to inspect your investment property.
- Bookkeeping fees.
- Cleaning at the end of a tenancy.
- Taxation advice relating to the property.
- Gardening and maintenance fees.
- Building and asset depreciation.
6. Sweat the small stuff.
There may be more things you can claim on tax than you realise. According to some quantity surveyors, the top five deductions most overlooked by investors aren’t the big-ticket items like hot water systems or garage doors, but in fact:
- freestanding garden sheds.
- solar garden lights.
- intercom systems.
- ceiling fans.
- tennis court nets.
And every little bit counts too. It’s estimated that claiming the cost of smaller household assets such as shower curtains, smoke alarms and lawnmowers in your rental place can increase the cash flow generated by the property by around 15 per cent.
Other tax deductions that often get missed on investment properties include freestanding bathroom accessories, automatic door remotes (yep, the thing that lives in your car’s drink holder), garbage bins, exhaust fans, synthetic lawns, roller door motors, and swimming pool cleaning systems. You might be able to deduct items you didn’t even know existed!
7. Consider a depreciation schedule.
A depreciation schedule outlines the gradual reduction in value of assets over time due to wear and tear. It helps track tax-deductible depreciation expenses for both structural components and equipment associated with your investment property.
The ATO has online guides and tools to help you track depreciation on your property, or you can have one drawn up professionally – and claim it on tax!
You may also be able to go back and amend tax returns for previous years if it turns out you’ve underestimated prior year’s depreciation costs.
Don’t let tax time turn you into a Grinch. By knowing your obligations and filing all related loan statements and expenses, you can enjoy a very merry EOFY.
Tax time is easier with ME.
Whatever your needs are this tax return season, we’re here to help. Find out more today.
End of Financial Year support
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.