We often hear that the rules governing investment property deductions are downright confusing. It is complicated, but a little preparation and good advice will allow you to structure your investment for maximum effect. We have put together our top tips for property investors to help you make the most out of your investment this EOFY.
Time your sale right to reduce capital gains tax. Planning on selling your investment property? You may have to pay capital gains tax (CGT) on any profit you make. CGT means that your profit from the sale will be considered income and is taxed at your marginal tax rate. In most cases, your CGT will be payable for the tax year that you exchange contracts. Depending on which year you’d like to reduce your taxable income, you may consider timing your exchange to suit. And remember, you’ll receive a 50% discount on capital gains made on investment properties you own for more than 12 months.
Have a depreciation schedule drawn up. Depreciation, being the annual decline in value of a property’s structure, permanent fixtures, plant and equipment, is a key thing for property investors to consider at EOFY. Common items that fall under this include ovens, washing machines, carpets and curtains. Depending on when you purchased your investment property, the specifics of which items are claimable will be slightly different. While you can draw up a depreciation schedule yourself, it is often wise to contact a quantity surveyor to assist.
Claim your borrowing expenses. Many of the costs associated with taking out your home loan are tax deductable. Fees, such as loan establishment fees, valuation fees, mortgage broker fees and lenders mortgage insurance, are usually claimable. If you’ve taken out a loan to purchase an investment property this financial year, or if you have refinanced your loan, then you will want to make the most of this tax deduction.
Considering lodging a PAYG withholding variation. Cashflow issues can arise from paying the interest on home loans as it falls due and then waiting until the end of the financial year to claim it back as a tax deduction. If this is the case, consider applying to the ATO for a PAYG withholding variation. This lets you adjust the amount of PAYG you pay throughout the year so you can receive tax deductions as they arise rather than waiting for them to be reimbursed. But be wary – if you adjust your PAYG too far downwards, you may have to reimburse the ATO when you lodge your tax return.
Prepay your interest. You may be able to push next financial year’s interest payments into this year and claim them as a deduction on your tax return. This would require a greater payment up front, but it could pay off with a considerable reduction in your income for tax purposes. This is particularly relevant if you earn a high income and have a substantial loan on your investment property. Note, you will need to speak directly to your lender to see if this is an option for you.
With a little planning and consideration, you can save yourself significant amounts of money this financial year. Only a few months away, now is the time to be thinking about all of this so that you are prepared. As always, talk to your accountant or financial advisor for specific advice on your own circumstances.