There are tonnes of things to know about being a landlord,
and so many ways to be hit with a massive tax bill!
So I’m here today to answer 6 of the most common questions asked by landlords!
This video is made in collaboration with InstaRent, an easy to use property management app
for both landlords and tenants! Be sure to check them out!
First question!
What are the biggest mistakes landlords make at tax time?
First of all, they claim deductions that are not allowed.
This results in more cost and possibly an audit by the ATO.
Next is structuring their property purchase incorrectly,
resulting in more tax such as stamp duty, land tax or even income tax.
And also, landlords are not keeping adequate bookkeeping records. Landlords need to record all
income and expenses and keep evidence for 5 years.
They also need to keep the contract of purchase and sale, and they need to ensure
they keep the record of timelines and changes of intentions for the property, for example,
when there was a home, when there was an investment property, and when it was vacant.
Another mistake is not understanding and forecasting their capital gains tax bill
when they’re selling their investment property.
Property investors take their proceeds and reinvest all of their cash into the next project.
They do not leave any taxes which causes serious cash flow issues for the investor
when the ATO comes knocking on their door.
And lastly, landlords tend to get the repairs vs capital improvements & allowances wrong.
Repairs are claimable in the year you spend the money,
whereas the capital improvements and allowances are claimable over the lifetime of the asset.
Some assets such as buildings are claimed over 40 years,
so you don’t get to claim the large cost straight away. We have seen landlords try to claim $20,000
in capital improvements as a repair and write it off upfront but unfortunately, that's not allowed.
A quick easy rule is if you are replacing a damaged or broken part then it's a repair.
Examples are like fixing a part of a fence or fixing a leak. If you are
replacing the entire structure or adding a new structure then it's an improvement.
Examples are like replacing the whole fence or installing a new dishwasher.
We’ve left a link in the description box you can check out for more details on this.
What are some deductions that landlords might not know about?
Some tax deductions that landlords may not know about is the depreciation of
building and equipment, and the borrowing cost of the bank loan, which includes the
bank fees and application cost. You would be surprised but some
clients forget about claiming interest on loans taken up for the property. They
may think they only have 1 loan but they may have 2 loans for the initial deposit as well.
So the interest on both loans are tax deductible.
Expenses paid by or charged by the property agent are also tax
deductible such as property maintenance fees, council rates, water rates and electricity.
Repairs and maintenance are also tax deductible as well.
So What are some deductions that you aren't allowed to make?
Unfortunately, now travel expenses to and from the investment property are not tax deductible.
Costs related to when you lived in the property are also not tax deductible.
You also cannot claim the interest on the property when it was your home.
When claiming against rental property income you can’t offset purchasing costs such as
legal fees and stamp duty. These expenses ar e only claimable when you sell the property
and calculate the capital gains. Expenses you cannot account for such
as cash payments to repair a door or lock are also not tax deductible. For example,
you go to Bunnings to purchase a new lock to repair a door for your rental property.
You say no to the receipt at the counter and go home. Unfortunately,
you cannot claim this as you don’t have adequate records and proof of payment.
So it’s a good habit is to keep all your receipts
properly and pay via the bank card instead. So don’t use the cash.
Lastly, the personal use portion of expenses is not deductible. Say you use the property
as a holiday home for 4 weeks in the year – you must apportion the expenses and not
claim 100% of the council rates, interest, etc. So What records do landlords actually need then?
So, whether you use a tax agent to prepare your tax return or do it yourself,
you need to keep proper records over the period you own the property.
Keep the right records for each stage of your journey
to ensure you’re able to claim everything you’re entitled to.
When you’re buying, make sure you keep a record of:
the contract of sale, the conveyancing documents,
the loan documents, the costs to buy the property, and the borrowing expenses.
While you’re owning the property, keep a record of:
The proof of the rental income, all your expenses, periods of private use by you or your friends,
periods of the property is used as your main residence,
loan documents if you refinance your property, your efforts to rent the property
out, and all your capital improvements. And when selling the property, keep a record of:
the contract of sale, conveyancing documents, fees relating to the sale of the property,
and calculations of the capital gain or loss.
It’s quite a lot, so here are some record-keeping tips:
Set up an easy-to-use record-keeping system as your first priority.
This can be as simple as a spreadsheet or you can use professional software, like InstaRent.
Keep records of every transaction over the period you own the property. This includes
contracts of the purchase and the sale, as well as the conveyancing documents and loan documents.
And lastly, scan copies of your receipts to make sure it’s easy for you to store and access.
How do you calculate and claim depreciation? Well, firstly what is depreciation?
Depreciation is a method of not claiming the full 100% cost of an asset straight away.
The idea is that you use the asset such as a building for many years.
So it doesn’t make sense that you can just claim it all upfront in one year.
Depreciation is the concept of claiming it over the life of the asset.
For example, buildings are claimed over 40 years at 2.5% per year.
To be honest, depreciation is a confusing calculation if you purchase the property
and want to claim depreciation.
You would rather rely on a property depreciation expert or a quantity surveyor to do a schedule
for you. They figure out all the costs of all the assets including the parts of the building,
and assets like appliances, then they hand that information to you
or us as accountants, to then process this into your tax return.
So I repeat, we accountants are not experts at this.
We do NOT know all the costs of the equipment, building, and assets.
We know a few good ones like Duotax or BMT depreciation experts.
So, if you purchase a new asset for the rental property you have to work out the useful life
of the asset. The ATO has a guideline on these general assets so you can find the guideline
on the ATO website. Then you can claim it using a straight-line method or a diminishing method.
I am not going to go into detail of the diminishing as it’s a bit confusing,
but the straight-line method is quite simple. You divide the cost by the useful life, on a graph,
it looks like a straight line. For example, if you purchase a
brand new cooktop at $1,200 and it can be claimed over 12 years, the depreciation
expense is $100 per year. Do you have any other tips?
Firstly, go get a tax depreciation report if you have a new or a relatively new property.
Also, if you have a read the ATO guide for Rental Property Owners. It’s actually quite good
for beginners. Be warned though, it’s 19 pages long! I’ve left a link in the description box.
Next up, you definitely want to get in a good habit with record keeping.
We always tell clients to use a separate bank account to manage the rental expenses. Do not
go putting all your expenses and personal expenses in one bank account because it causes a nightmare.
Best to have a separate bank account for each rental property and allocate the expenses of each
property to each separate bank account. Don’t lump it all together, because it’s hard to record.
Another tip is to consider landlord insurance and make sure you review your insurance policies.
There is always a risk being a landlord and we have heard
some very bad stories costing landlords over $20,000 in costs!
Lastly, and I cannot stress this enough, it’s important to get a good team of experts.
You don’t need them all at once but keep a lookout for the following:
Accountants, conveyancers, quantity surveyors, buyers agents, real estate
agents, insurance brokers, and builders. Obviously, pay for their time as they are experts
at their game. They will save you thousands of dollars from their advice and services.
And that’s it from me, this video was made in collaboration with
InstaRent, an easy to use property management app, so go check them out!
And if you have any questions, leave them in the comments below! I’ll see ya next time!