TAX TRAPS TO AVOID
ANTHONY KEANE
BOOMING house prices have attracted a new breed of property investors who join more than 2.2 million other Australians using real estate to build wealth.
Tax time can be lucrative for investors, and many receive a refund boost because of their negatively geared properties.
But tax traps lurk for the unwary. A mistake on your tax return can potentially cost thousands of dollars, or result in unpleasant penalties from the Australian Taxation Office.
The ATO has flagged property investment as a key area of its compliance focus this year. Here are five areas where tax time mistakes can be costly.
It’s easy to remember tax deductions for the interest bill on investment property loans, but other claims can be missed. Forgetting to claim for things such as insurance, land tax, pest control, repairs and maintenance is like throwing cash out the window.
And over-claiming deductions is dangerous because the ATO’s datamatching technology quickly notes questionable claims, and often queries them before the tax return is filed.
The biggest tax deductions missed or under-claimed by property investors relate to items including carpets, curtains and appliances as they decline in value over time.
Studies have found while many investors claim some level of depreciation, plenty don’t maximise it by seeking a tax depreciation report from a quantity surveyor.
Writing down the construction cost of a home – typically 2.5 per cent a year over 40 years – delivers investors some of the biggest deductions. And it doesn’t cost them a cent from their pocket.
You can’t hide a profitable property from the taxman when you sell, because the ATO has access to records from states’ lands titles offices and knows what is bought and sold.
Its super computers track transactions, and with property capital gains producing some of the biggest tax bills, this is a key focus area.
The ATO is also monitoring redraw facilities on property investment loans to make sure this debt relates to the correct asset.
The ATO is closely watching property with a mixture of personal and business use, such as a holiday home or room rented on an accommodation platform.
Investors can’t claim full deductions on a property if part of it is used personally. Everything must be apportioned, and claims are only allowed for the period a property is genuinely available to rent. If only part of it is used the generate income, deductions must be worked out on a floorarea basis, the ATO says.
Real estate is a large, lumpy asset, so think carefully about timing buying and selling.
Anyone who holds a property asset for more than a year gets a 50 per cent capital gains tax discount.
This can be worth tens of thousands of dollars.
Timing a sale in a year where other income is low may be beneficial.
Some expense deductions must be spaced out over time, while others are not immediate deductions and only apply at the time of sale.
The ATO has a handy guide, Rental Properties 2021, to help clear up investor confusion.