Tax deduction trap landlords need to know

REAL estate investors who live in their properties before renting them out are risking missing out on thousands of dollars a year of tax deductions.

The fresh warning from BMT Tax Depreciation comes as investors are already bracing for controversial changes to negative gearing and capital gains tax from January 1, if Labor wins the federal election.

BMT Tax Depreciation’s examination of internal data has found that more than one in four people live in their property before renting it out, and the proportion is growing.

New laws that came into force last financial year shut the door on investors claiming depreciation deductions for items including carpets, curtains, furniture and appliances if they didn’t buy the property or the items brand new.

“Under the new laws, if an investor is living in a property at the time the assets are installed, the items will be considered previously used an cannot be claimed,” BMT Tax Depreciation chief executive officer Bradley Beer said.

“Our data suggests that a growing number of people are opting to live in a property while renovating and before renting it out. If they choose to make these types of additions to their property during this time, they could lose out on thousands of dollars of tax deductions.

“Be careful not to get caught by intricate rules with legislation that doesn’t really make a lot of sense.”

Last financial year property investors claimed depreciation deductions averaging $8212 per property, Mr Beer said.

Property investors who don’t buy brand new are also in line for a hit from Labor’s plans to ban Bradley Beer says property investors are at risk.

WARNING:

negative gearing deductions for future purchases of secondhand property, and halve the capital gains tax discount from 50 per cent to 25 per cent on future asset purchases.

This is expected to weaken investor demand, pushing down prices but pushing up rents.

“Unless investors buy property, rents will end up rising because it’s a simple supply and demand problem,” Mr Beer said.

Real estate author, academic and investor Peter Koulizos said that in 1985, when Labor previously “fiddled with negative gearing and introduced capital gains tax”, property prices dropped by 10 per cent and construction fell 27 per cent.

Mr Koulizos forecast property to fall again if Labor was elected, but not by as much because most cities were already in downturns.

“I understand they’re trying to make property more affordable, but making it affordable is code for property prices coming down,” he said. Mr Koulizos suggested investors buy established properties before January 1.

“Even though buying a new property has greater depreciation benefits, its capital growth isn’t as good,” he said.

“The change in the capital gains tax discount is going to have a much bigger impact on long-term investors than negative gearing. But don’t panic. Let’s wait until May and see what happens.”