Investment property mistakes to avoid at tax time

Tax-time claims can make the difference between an investment property being positively or negatively geared, which in turn could prove the difference between a tax refund or tax bill.

No matter whether you're a seasoned investor or an absolute newcomer, it pays to be diligent around end-of-financial-year considerations.

Yet in the hustle and bustle of life, mistakes are easy to make. Particularly where taxes are involved, mistakes typically prove to be both expensive and difficult to rectify - which is why prevention is always better than cure.

Reporting requirements

First, don't get caught failing to declare, or underreporting, rental income. All income received from renting out a property must be declared in your tax return - rental income as well as expense reimbursements, easement rental, insurance payouts and renewable-energy payments.

Property agents generally provide an annual report disclosing all income and expenses pertaining to the property over the financial year - check it carefully for any errors, omissions or duplications.

If you manage the property yourself, compiling this information falls on your shoulders.

Purchase and sale costs

Provided they relate directly to an investment property, and therefore derive investment income, virtually all purchase and sale costs are tax deductible.

Borrowing costs, for instance, cover everything relating to a loan to buy, refinance or renovate a property - such as lender's mortgage insurance, title search and loan establishment fees, valuation costs, and stamp duty on the mortgage.

Generally, borrowing costs are spread over the loan term or amortised over five years, whichever is shorter. Other purchase and sale costs include solicitor, agent and mortgage broker fees, and marketing costs.

Maintenance, repairs and improvements

The next consideration is the ongoing costs of owning and maintaining the property to a rentable standard, as well as the costs of managing the investment.

Property investors are generally good at claiming deductions for tangible items, such as repairs or new installations, but overlook intangible costs like council rates, water/sewerage rates, land tax, and insurances.

When determining how to claim these expenses, remember this golden rule: repairs are usually deductible within the tax year they are paid for, while improvements are typically depreciated over multiple years.

Depreciation

Speaking of depreciation, new investors often don't realise the full extent of what can legitimately be claimed.

Established investors, meanwhile, often overlook depreciable expenses - especially smaller ones or subsequent years for previously lodged expenses.

Depreciable assets within an investment property include appliances, carpets, floating timber floors, curtains and blinds.

Furniture can also be claimed if the property is leased as furnished. As each item has a different useful lifespan, the length of time they can be depreciated will vary accordingly. Sourcing a depreciation report can be a useful investment (and is tax deductible) to highlight all depreciable assets and expenses.

Changing usage

Who occupies the property has a direct bearing on you tax status, so it is crucial to make the dates align when a change in use occurs.

Change of use may involve making an investment property your principal place of residence (or vice versa) or offering the property as a short-term let (on Airbnb or similar) while you are not using it. In the short-term, deductions and depreciation can only be claimed for the period that the property was rented out (or in certain instances, advertised for rent).

Meanwhile, come sale time, capital gains tax will apply to income-generating periods.

Advisory costs

Advisory services related to an investment are also tax deductible. Property management fees are the most obvious, but investors can also claim fees for their accountant, mortgage broker (if any), agents and solicitor.

Ongoing financial advice is another expense that often gets overlooked at tax time, as are self-managed super fund (SMSF) advisory fees, where your super owns the property.

Investment structures

There are numerous ways to own an investment property: personally, through a trust or SMSF, or in a business. Each has their own tax advantages and requirements.

A change in your circumstances could mean a change in this ownership structure becomes beneficial. If you already made a change within the current financial year, you would need to comply with both sets of rules for the relevant periods.

Back to basics

Embrace the opportunity to review the basics, ensuring that your investment is delivering maximum bang for your buck. Look back over your investment plan and see whether any tweaks need to be made - based on your own circumstances as well as the property itself, the local market and the wider economy.

Check your spending because timing matters. Sometimes, it is preferable to bring forward essential purchases so you can claim the deduction sooner and leverage that extra cash.

Conversely, it may be wiser to hold off until after June 30, such as if you're likely to move into a higher tax bracket next year.

Consider what to do with your investment proceeds. You may be able to further offset your tax by using this income to make additional super contributions. Alternatively, the money could top up your emergency fund or be reinvested.

Finally, get good advice.

Don't leave your tax and finances to someone else (a parent, partner, or adult child). Tax laws are complex and ever changing, property markets vary, and individual circumstances are unique.

Sound professional advice will ensure you remain compliant with the law and maximise your investment returns - which is the entire point of investing.

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