Here is a list of the 10 most common mistakes that investors make when preparing tax returns for rental properties from a partner at BDO Kendalls.
TIP l: Repair or improvement?
There is a fundamental difference between a repair and an improvement – the former is tax-deductible. but the latter is considered capital and therefore not tax-deductible.
To determine if something is a repair or an improvement, consider: did the work done restore something to its original condition or did it improve it to a condition beyond its original state?
TIP 2: Non-deductible costs
Just because something is not tax-deductible does not mean it simply fades into the tax black hole. Any work done on a property that is capital in nature may still attract some tax perks.
If you acquire a free-standing functional unit, it may be classified as a depreciating asset on which you may claim a depreciation deduction. If the item acquired is affixed to the building, it may constitute ‘construction expenditure’ on which you may claim a building allowance deduction.
TIP 3: Building allowance
You are generally allowed to claim an annual building allowance of
2.5% or 4% on the construction expenditure incurred on structural improvements attached to land. However, construction expenditure is not synonymous with the amount one pays to acquire the property.
TIP 4: Interest expense
Most people assume that any loan drawn down that is related to their rental property is immediately tax-deductible. While this is generally true, the deductibility of interest is contingent on a strict tracing of loan funds to ascertain the purpose for which the funds are drawn.
TIP 5: Borrowing costs
These are costs associated with the access of loan funds that are used to purchase a property. If the amount incurred is less than $100, it may be claimed as an immediate tax deduction. If the amount exceeds $100. the amount will need to be claimed progressively over the life of the loan or five years, whichever is shorter.
TIP 6: Legal fees
Legal fees related to the purchase or sale of a property are included in its cost base and are not tax-deductible. However, legal costs incurred to deal with the day-to-day operations of the property, eg, drawing up a lease, are tax-deductible.
TIP 7: Body corporate fees
Many property investors seem to think that body corporate fees are categorically tax-deductible. While this is generally true for regular body corporate fees, special levies and sinking funds that are used to fund capital improvements on the property are not tax-deductible.
TIP 8: Travelling expenses to inspect property
If your primary intention to travel to a particular location is to inspect your property but you also intend to use the opportunity to go on a holiday, there will be multiple purposes behind the trip. This means that the associated travelling expenses will need to be reasonably apportioned.
TIP 9: Available for rent?
An expense is only tax-deductible to the extent that the property is used for an income-producing purpose. Therefore if a property is not available for rent for part of the year, the expenses incurred on the property for that year will need to be apportioned.
TIP 10: GST
Residential property leasing does not attract GST, but the leasing of commercial properties does. Generally, if you own commercial properties and the combined projected annual gross rent of these properties will exceed $50,000, you are required to be registered for GST. This will also mean that you are automatically liable for GST on 1/11th of the gross rent,
From Australian Broker – December 2009
We are frequently asked by investors about the property market. In our last Investment News, we reported that dire predictions of the market’s imminent collapse had been shown to be wrong. As a result, one prophet of gloom, Steven Keen, now has to walk from Canberra to Mt Kosciusko wearing a t-shirt proclaiming his error.
So what has been happening in property in 2009?
The overseas picture
With the onset of the Global Financial Crisis, some property markets have experienced a significant downturn. The problems in the US are well documented and are likely to be ongoing, as the entire nation enters a sustained period of enforced saving.
The UK has also had a difficult time, with house prices recently posting their first quarterly increase since the third quarter of 2007. Closer to home, New Zealand is still down on its peak in 2007, although there are signs of consolidation and recovery.
Property in Australia through 2009
The experience in Australia has been markedly different. In 2008, the market reduced by 3% ‘peak to trough’ between February and December. However, by March 2009 it was becoming clear that this softening was limited both in scope and duration. At this time, Anthony Richards, the Head of the Economic Analysis Department of the Reserve Bank of Australia, noted that:
1. the weakness in housing prices was mainly at the higher end of the market; and 2. preliminary data was already showing a significant pick-up in the market.
Although we have obviously not yet completed the final quarter of 2009, it seems clear that Richards’ early assessment was accurate. According to RP Data-Rismark, by the end of the third quarter Australian house prices had risen by approximately 8%.
Of course, not all regions in Australia were equal. Darwin experienced 6.3% growth in the third quarter alone and Melbourne and Sydney easily exceeded the national average. However, other regions, such as Brisbane, Perth and Adelaide, have been less buoyant, despite having provided the best overall results in recent years.
Property performance and investment
There is no doubt that many who have ridden the recent roller coaster on equities markets would be looking enviously at the stability of the Australian property markets. But investors should always recall that the property market does not rise and fall uniformly. All investment, including property investment, involves risk.
Posted by LaTrobe Financial on 26/11/09
With property prices in many capital cities hitting new highs, people are once again asking: “Can property values keep rising?”
We’re told that we have record population growth and we’re not building enough houses, and this is pushing up property prices.
So do we really have a shortage of dwellings? And can property prices keep rising?
Well…yes and no. Like most things –it depends.
You see, there’s not one housing market so it’s impossible to make a blanket statement about whether we have a housing shortage or not and whether property values can keep increasing.
Like most things in property it’s all about supply and demand.
While many first home buyers are looking to set up family in the new outer suburbs, a good proportion of them want to buy apartments in the “aspirational” inner suburbs of our capital cities close to their work and entertainment. This also happens to be the same market where many investors are looking.
At the same time, established homeowners are looking to upgrade their homes in these inner and middle ring suburbs.
With more buyers wanting the same type of properties in the same suburbs, yet fewer properties on the market than a year ago, we have a shortage of supply in locations where people most want to live…and this means property prices will keep increasing.
With very little construction of medium and high density dwellings (apartments and townhouses), this shortage of properties to buy or rent is unlikely to change for some time. Currently banks are reluctant to lend to developers, and when they eventually do turn on the taps there will be a lag of a number of years before new developments are completed. And these new developments will have come on stream at considerably higher prices than currently achieved to allow the developers to make the kind of margins that banks will want to see.
While there may be a surplus of CBD apartments in those new high rise towers, in general these cater for investors and over 80% are inhabited by tenants. Few homebuyers are keen on living in the centre of the city, so the many high-rise towers developers have on the drawing boards are unlikely to change the groundswell of unmet demand from homebuyers, who will head for the suburbs.
Yes property values will keep increasing in these inner and middle ring suburbs.
However there’s no shortage of housing in the outer suburbs of our major capital cities where builders are busy building new stock. There is also lots of land, resulting in subdued price growth.
Similarly in many regional and rural areas, demand is low and housing is plentiful, meaning there will be only modest price growth.
So is there a housing shortage? Yes in some areas and no in others.
Will property values keep increasing? Yes, but significantly more in some suburbs than others.
As home owners and investors (and tenants for that matter) head for the inner and middle suburbs, areas where the land is already built out, yet which offer proximity to workplaces, schools, public transport, shopping and entertainment facilities, rents and property values will keep increasing.
What about affordability? There will always be cheap properties around – just look in the outer suburbs or regional or rural Australia. The problem is most people just don’t want to live there.
Posted by Michael Yardney on 24/11/09