Tax traps that sting property investors

Tax time can be lucrative for property investors, but it can also be costly if you get it wrong

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.

This time of year – 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, and 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.

DEDUCTIONS

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 just like throwing cash out the window.

And over-claiming deductions is dangerous because the ATO’s data matching technology quickly spots questionable claims, and often queries them before their tax return is filed.

DEPRECIATION

The biggest tax deductions missed or underclaimed by property investors relate to items including carpets, curtains and appliances as they decline in value over time.

Studies have found that while many investors claim some level of depreciation, plenty don’t maximise it by getting 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 own pocket.

GAINS AND LOSSES

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 real estate is bought and sold.

Its supercomputers 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.

PERSONAL USE

The ATO is closely watching property with a mixture of personal and business use – such as a holiday home or a room rented out on accommodation platforms such as Airbnb.

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 a property is used to generate income, deductions must be worked out on a floor-area basis, the ATO says.

TIMING TRAPS

Real estate is a large, lumpy asset, so think carefully about timing buying and selling.

Anyone who holds a property asset for more than one year gets a 50 per cent capital gains tax discount, which can be worth tens of thousands of dollars. Timing a sale in a year where other personal 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 confusion.