How to Manage Your Tax Obligations

With another financial year now behind us, it is time to start thinking about doing your taxes. While this is not something anyone particularly enjoys, it can be especially difficult – and confusing – for property investors. With additional assets, income sources, and deductions to declare, investors’ returns tend to be a lot more detailed.

This is why we always recommend you engage a qualified and experienced accountant to look after your taxes. They will do all the hard work for you and guide you through collating all the information you need. They should also be able to suggest ways to minimise your obligations and bring down your annual tax bill.

Reducing the amount of tax you need to pay usually requires you to plan ahead and carefully manage your portfolio. As such, now is the perfect time to think about your tax minimisation strategy for the year ahead. To help with this, we want to take a closer look at the main minimisation approaches successful investors adopt.

Gearing your investments

A property’s gearing comes from the finance (e.g. a mortgage) required to pay for it. If the loan repayments are less than the regular rental returns, the property produces income and is considered positively geared. Conversely, if the property costs more to maintain than it makes in rent, it is negatively geared.

As a general rule, we advise the investors we work with to focus on positively geared properties. This helps reduce your financial risk and the income the property produces can be put toward growing your portfolio. That said, the additional income is subject to tax and will increase your total tax obligation.

As such, many investors prefer negatively geared properties as the losses can be claimed as deductions at tax time. This means that the additional costs you pay throughout the year can be used to reduce your taxable income. It also helps offset these expenses, allowing investors to focus on the long term gain of capital growth.

The role of depreciation

Over time, natural wear and tear can have a significant impact on the condition, and value, of an investment property. From kitchen appliances to floor coverings, most of the fixtures and finishes will need to be replaced at some point. Acknowledging this, Australian tax law allows you to claim the gradual decline in value as a deduction.

An important caveat here is that these rules only apply to properties that produce income (i.e. investment properties). This means that the property must be tenanted, or at least advertised for rent, for the deductions to be claimed. You should also engage a quantity surveyor to prepare a depreciation schedule, as this will detail what you can claim.

Repairs, advertising, and other deductions

There is a range of other costs associated with owning an investment property that can help reduce your taxable income. This includes:

• Maintenance: As a landlord, you are required to keep your property in roughly the same condition throughout a tenant’s lease term. Any costs you incur as part of this, like hiring tradespeople and repairing broken appliances, will be tax deductible. However, you will need to be careful with this as anything that is classed as an “improvement” cannot be claimed.
• Leasing costs: From advertising fees to administration expenses, there are several costs associated with finding a new tenant. As these are seen as critical to producing income from your investment property, they are also tax deductible.
• Insurances: The fees associated with insuring your property (landlords’ insurance, mortgage insurance, etc.) are considered a cost of investing. As such, they can also be used to reduce your taxable income.
• Rates and utilities: As they are unavoidable holding costs, council charges and utility connection fees are also tax deductible. This only applies to properties that produce income and the costs cannot be rolled over to future tax years.
• Professional services fees: The cost of engaging qualified professionals to help manage your investment properties is also tax deductible. This includes lawyers, quantity surveyors, accountants, other financial advisers, and real estate agents and property managers.

Want to discuss this further?

If you have questions about navigating tax time as a property investor, give Search Party Property a call. While we are not financial professionals ourselves, we understand the obligations that come with owning investment properties. We also work closely with a range of financial specialists and can connect you with suitably qualified expert support.