Tax tips for property investors: how to get more money back

Are you missing out on certain claims and deductions when it comes to tax time? Here’s how property investors can make the most of their tax returns.

What can you claim?There are a lot of tax-deductible items that property investors may not be aware of. Although a tax deduction on the more financially demanding items is a lot more attractive, the little things do add up. The following is a list of tax-deductible expenses related to owning an investment property:

• Advertising costs and management fees
• Lease costs
• Building and landlord insurance
• Accounting and bookkeeping fees
• Tax-related expenses
• Council rates
• Legal expenses – in case of mediation or tenant/landlord dispute
• Depreciating assets
• Loan interest and ongoing fees
• Travel expenses – to inspect the property etc.
• Strata/body corporate fees
• Electricity, gas and water
• Repairs and maintenance
• Quantity surveyors’ fees – a quantity surveyor is a professional who is qualified to produce depreciation schedules, which you can use to claim tax benefits from property depreciation
• Stationery and postage expenses relating to managing your property
• Garden maintenance

However, these are not necessarily applicable to all investment properties or investors, and may not always be paid in full.

There are a number of misconceptions about claimable expenses such as initial repairs. Repairs made to the property immediately after purchase are typically not tax-deductible, as they are viewed as capital in nature.

It is also commonly believed that there is a cap on the number of travel expenses deductible per tax year. This is not the case, as long as the property owner retains proof that the trip was purely for business purposes.

It is essential that all receipts are retained at least until your tax return has been finalised, as it is not uncommon for the ATO to contact property investors for proof of expenses. It is suggested that receipts and other proof of purchase are kept for a minimum of five years.

What is depreciation and how does it work?A property will inevitably depreciate in value from wear and tear over time, and much like with a car used for business purposes, the depreciation of an investment property can be claimed as a tax deduction – as an investment property is purchased for income-producing purposes.

Property investors can claim depreciation on a property for a maximum of 40 years from the date of construction completion, which means investing in newer properties will give you greater depreciation benefits.

There are two main categories investors can claim for rental property depreciation – plant and equipment deductions and capital works/building deductions.

Capital works deductions involve anything to do with structural elements of the property, such as:

• Structural walls
• Wiring
• Brickwork
• Windows
• Plumbing

Although deductions on capital work apply for 40 years from the date of construction of the property, renovations to the structural elements of the building can be claimed from the time of renovation.

Plant and equipment deductions involve anything that is easily replaceable within the property, including:

• Tap fixtures
• Carpets
• Blinds
• Water systems
• Appliances

These parts of the building will depreciate from the time of instalment for the duration of each item’s individual effective life, with no reflection on the age of the property. The ATO has standard measures that determine the age of individual items. Once an item has reached the end of what is deemed to be its effective life, you can no longer claim depreciation of its value.

In order to make a claim for the depreciation of a property, investors must obtain a depreciation schedule, which lists deductions available on a specific property. Depreciation rates are determined by the original cost of construction of a property. Quantity surveyors can estimate construction costs for depreciation purposes when there are no records of these for a particular property, and produce depreciation schedules.

Investors frequently miss many items eligible for tax depreciation, particularly the following:

Top assets on which tax depreciation is rarely claimed
Asset	Depreciable Value
Exhaust fans	$125.00
Bathroom accessories – freestanding	$110.00
Shower curtains	$30.00
Door closers	$185.00
Smoke alarms	$145.00
Garden sheds – freestanding	$855.00
Ceiling fans	$265.00
Clocks electric	$20.00
Garbage bins	$250.00
Light fittings non-hardwired	$80.00
Mirrors – freestanding	$185.00
Radios	$55.00
Rugs	$245.00
Solar powered generating system assets	$5,500.00
Window shutters automatic	$800.00
Spa bath pumps	$425.00
Tennis court nets	$550.00
Garbage disposal units	$455.00
Water filters, electrical	$195.00
Garden lights, solar	$20.00
Tennis court maintenance equipment	$900.00
Closed circuit television system	$1,550.00
Water feature pumps	$225.00
Garden watering systems	$558.00
Intercom system	$745.00

Source: BMT Tax Depreciation

Understanding negative and positive gearingIn terms of property investment, gearing is where funds are borrowed in order to invest. It is important to understand how your property is geared to ensure you maximise your tax benefits.

Negative gearingNegative gearing occurs when the total rental income of a property is less than the total costs involved with owning the property, including mortgage repayments, strata fees, maintenance costs, etc. A negatively geared property will put investors out of pocket initially, but is expected to grow in value over time – thus offsetting the initial losses.

Negatively geared properties allow investors to claim tax deductions from the expenses incurred from owning and maintaining the property. Investors may also be entitled to reductions on taxable income if they own a property that is negatively geared. A loss on an investment property is determined by subtracting the total amount of monetary loss from your annual taxable income, meaning you will be taxed at a lower overall rate.

Positive gearingPositive gearing occurs when the total rental income of a property is more than the total costs involved with owning the property. A positively geared property gives you a secondary income, which is desirable – however, it is taxed accordingly.

Where to seek advice

• Quantity surveyors – a quantity surveyor can issue individual property depreciation schedules, which you can use to benefit from tax deductions for depreciation of your property’s value.
• Accountants – always appoint an accountant to finalise your tax return. Accountants’ fees are a tax-deductible expense for property investors.
• Australian Taxation Office (ATO) – the ATO has information available specifically for property investors, such as the income you must declare, expenses you can claim, expenses deductible immediately and expenses deductible over several years.

What is a dual-income investment?

Earning two incomes from the one property sounds like every investor’s dream come true, but is there more to dual-income investments than meets the eye?

A dual-income investment is effectively what is says on the tin – a property that provides two incomes to an investor, by way of two separate rental agreements. It may be a granny flat, a duplex, dual occupancy, or a dual-key property.

All property types have provision for two incomes, but each differs slightly in its presentation, cost, and buyer/renter appeal.

A granny flat is an additional dwelling, typically the same size as or smaller than a studio apartment, usually situated in the backyard of an existing property. Some granny flats don’t require council approval for construction and in recent years, particularly in markets such as Sydney, they have become an increasingly popular addition to many suburban homes.

A duplex is two adjoining properties on the same title (in the majority of cases) – or a residential building divided into two apartments/townhouses. Although duplexes can be sold individually, investors can choose to construct them as a way of gaining a larger number of properties from the one plot of land. Each side of a duplex is typically identical to the other, as this maximises building and material efficiencies.

Dual-occupancy properties are similar to duplexes in that they consist of two properties on the one plot of land, but they do not necessarily have to be adjoining. For example, on a larger plot, say, in a rural residential area, two properties may exist on the one plot of land. Dual-occupancy properties typically share infrastructure such as entrances and driveways.

Dual-key properties are properties with floorplans that allow for an area of the residence to be locked off for separate use. Each resident may share common facilities such as the front door, but have access to separate areas of the property for their living quarters and kitchen facilities.

Advantages of dual-income investments
Advantages of dual-income investments include:
• Maximising the potential of one block of land: instead of having a single property on a large block of land, you can utilise more of the space available to you
• Improved cash flow, which can contribute to your loan-servicing capacity
• Reduced maintenance costs
• Increased portfolio size without the cost of outlay associated with buying two properties

Disadvantages of dual-income investments
• Reduced property desirability: many owner-occupier buyers may not be attracted to a dual-income investment. The design may not suit their requirements, or they may simply not be attracted to the idea of having another property attached, or in close proximity, to their residence.
• The risk of overcapitalising: it’s very easy to spend money on developing a dual-income investment that may not be reflected in the value of the overall property. For example, while granny flats can be a cheap entry point into property investment, it is very easy to develop them to a higher level that may not be reflected in the asking price come sale time.
• Minimal contribution to equity: following on from the previous point, the lack of market value attached to some dual-income properties means that they may not be the best vehicle for enhancing equity, and therefore increasing your borrowing capacity.
• Being stuck with multiple vacant properties in the one area: diversification is the key to avoiding the risks associated with property investment, and dual-income investments run the risk of being stuck with two losses of income, not one, if the market takes a turn for the worse in that area.
• When it comes to sale time, it may be impossible to sell the properties separately (with the exception of some duplexes). This has the potential to present significant challenges.
• If you want to pass on the cost of some utilities, such as water expenses, to each of the properties in your dual-income setup, you will need to spend the extra funds required to establish separate meters for each property.

What you need to know before you buy a dual-income investment
Unless the investment is simply establishing a basic granny flat in your backyard, the difficulty of generating equity in some dual-income investments may mean that it’s not the best investment option for those just starting out. You could potentially spend a lot of capital establishing a dual-income property that, while providing a high yield, may not allow you to establish your investment portfolio as fast as you would like.

For investors with well-established portfolios, who can afford the significant outlay of establishing a dual-income investment and are at the stage where they want a high-yielding asset to improve their cash flow situation, a dual-income investment may be a worthy consideration.

It’s important to remember that design considerations are key to a successful dual-income investment, particularly if it’s a duplex or dual-key investment. If you’re buying a property off-the-plan from a builder, or choosing a standard floorplan, be sure to understand the room configurations and flow, the bedroom and living room sizes, the available storage and general finishes, the orientation and whether these characteristics are in line with the expectations of the renter demographic in the area.

Uncover More Investment Options with Newly Built Homes

Flipping a property by purchasing an existing house and renovating it has long been a great way to invest.

However, a growing number of individuals are looking to expand their property investment portfolio with newly built homes. Not only can a newly built home allow for a great potential return on investment it can also accommodate the various requirements of investors.

Metricon is one such builder that caters to this growing market, with a range of different alternatives to suit the variety of needs of investors. Metricon has over 40 years of experience and have been awarded numerous building awards.

The Display Home

Investing in a property with the intent to rent it out can be somewhat challenging for most, since an investor does not always have a guarantee of having a long-term tenant. However, one unique solution is purchasing a display home. Display homes allow an investor the ability to purchase a high quality home in some of Australia’s best suburbs and estates.

One of the biggest benefits accompanying a display home is having a secure long-term tenant. Any maintenance issues that should arise in your display home will also be taken care of during the display period. When the display period has passed, you can count on some extra benefits, because you can always move in or rent the property out further.

 

The Dual Occupancy Home

Having a reasonably sized block of land could be a great investment opportunity, especially if you decide to have a Dual Occupancy development built. The principle of a dual occupancy investment is simple- two or more homes can be built on a single block of land. This allows an investor the ability to maximise the potential of their block.

Choosing a building company that can assist you with town planning, permits and local council regulations is key when undertaking a dual occupancy investment plan. Metricon are experts in this area and can assist with the process of building dual occupancy homes.

Building a dual occupancy property gives the investor some great options. They can rent out the properties, sell them or a do a mixture of both. An investor could even live in one of the properties themselves.

First-Time Home Buyer Benefits

Property is always a great potential place to start investing. It allows people to get a foot in the door on the property ladder and build a potential strong nest egg for the future

“Buying your first home can be a daunting endeavour,” says Steve Matsoukas from The Loan Gallery.

Mr Matsoukas believes that the market can be a difficult place to navigate, but his company can help.

“There’s a lot of conflicting information in the market place,” he says, “Our role is to help buyers clarify where they stand and what they need to do to get into their first home.”

The Loan Gallery is the preferred finance partner of Metricon homes and can provide credit assistance to eligible purchasers to secure tailored home loan that suits their requirements. And to make buying easy, Metricon provides home and land packages in great locations.

First time buyers could also find savings from other areas, such as the First Home Buyer Grant and reductions on the stamp duty charges depending on the location of the investment property. With so many benefits, a first home buyer is closer to becoming an investor than they might think. We can show you how.

 

Townhouses for Big Investment Projects

Successful property investors looking for a big investment opportunity may findtownhouses and retirement living options the most interesting. Some builders can even become a partner in a joint venture relationship, which could potentially increase the value and the return of the investment, since the partner in your investment may have experience in the investment industry.

Townhouses and retirement living options are always in demand; this is why they are suitable for some of the larger investment projects. However, to be successful in your investment journey, you will need the knowledge and the expertise of an experienced investor, especially when you deal with an investment of a considerable size.

Designing and Building

Instead of hiring a separate architect and builder, there are some benefits to hiring a company that does both, for example an experienced builder/designer such as Metricon.

By hiring a company that does both, investors can use a single agency to talk through all their options. Choosing one company to execute both tasks could save an investor some money as well, since these companies tend to offer some attractive prices for their services.

A good investment is a matter of making the right choices. By searching for the right information, and choosing a reliable builder, the chances of obtaining a good investment will increase dramatically.

The Biggest Property Investing Mistake…..

Have you fallen victim to one of the biggest Property Investing Mistakes without even realizing it?  

 

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Getting your strategy wrong from the outset has  implications that will be felt for years to come.

Affordability isn’t a strategy, Positive Cash-flow as a global statement isn’t a strategy.  Think of your strategy in terms of an onion.  A well constructed strategy should have many layers, it should consider your personal, financial and lifestyle circumstances yet be flexible enough to adjust as they change over time to keep your investment journey on track.

Your strategy is the foundation upon which you build your portfolio and ultimately your wealth – so it needs to be strong from the outset – to minimize its importance by adopting a cookie cutter approach or overlooking this step entirely is the biggest Property Investing mistake an investor can make.

If you have spent any time looking at property media, you would have seen numerous experts touting a myriad of different strategies as the ‘best one’.

Positive cash flow, negative gearing, renovate for profit, subdivision, off the plan, small development and commercial – just to name a few.

Each expert will give you reasons why their chosen strategy is the best – giving you financial freedom with less stress and less risk.

So which one is the best strategy?

Wrong question. You should be asking, “Which is the best investment strategy for my circumstances and will keep my investment journey on track?”

There is no such thing as a universally “perfect” property or investment strategy. The right investment property is unique to you – just as the right strategy is unique to the investment property.

Always Consider Your Entry and Exit Strategy

Throughout the accumulation phase of your investment journey you should be open to consider a diverse mix of strategies as each purchase will be influenced by your personal circumstances, how the other properties in your portfolio are performing and the market conditions / current phase of the property cycle at the time of purchase.

Ultimately, prior to going unconditional on a contract, every property you acquire needs to have an identified purpose as to how it will contribute to the overall financial goals you are working towards.  

Investors also need to be mindful of their entry and exit strategy which I consider equally important.  Many investors overlook their exit strategy at the time of purchase yet my many years of experience have taught me that this is fraught with consequences – most of them costly.

I have mentored many investors whose entry strategy was based on the attractive cash-flow of a property, yet they had not projected forward enough to consider who would buy their property if the market prices / rental returns declined taking the appeal out of the market for investors.  If the local population and overall economic infrastructure is not large enough and diverse enough to underpin the demand and provide an exit option, they can find themselves stuck and on the sideline, with their investment plans seriously derailed.

Does your investment strategy focus on “Income” or “If-come”

To be of the opinion that one cookie cutter approach can be applied to all property investors is fundamentally flawed yet I talk to investors every day who have fallen victim to “Property Investment Companies” and “Property Spruikers” who constantly beat the same drum as they herd all the investors into the same pen so they can punch out the same cookie cutter formula that suits the company’s business model – often at the expense of the investor. 

Let me demonstrate how this looks.

Pretend it’s 2011 and there are two investors looking to purchase a property valued at $400,000.  

Investor A follows the advice of positive cash flow proponents. To chase the highest returns, he would have looked towards mining towns and regional centres. His focus is purely on an “Income Strategy”

Investor B applies a negative geared / capital growth “If-come strategy” where the strategy relies on taking an upfront loss with the anticipation that growth will occur, we just don’t know when. At this time he would have looked at purchasing properties in capital cities such as Sydney and Melbourne.

Fast forward a few years and Investor A would have initially enjoyed strong positive cash-flow. However as prices and rents fell across regional Australia and in locations that relied on the resources sector, he would have found rents and values dropping so dramatically he ended up with a negatively geared property worth less than he paid.

Investor B’s capital city purchase would initially have required him to budget for out of pocket holding costs every month. He would have then seen both rents and values increase - so the property he purchased would now be hovering around neutral to positive in cash-flow while being worth up to 50 per cent more than what he paid.

In this situation, Investor B is now in a much better financial position overall.

But this example doesn’t automatically mean that investor B’s negative gearing is the strategy you should apply to your portfolio as the way a property is ultimately geared is going to be different in every circumstance and will be influenced by the property and also the investors unique circumstances.

The strategy chosen needs to be in line with the investors overall risk profile while also financially modeling potential worse case scenarios to ensure you have the financial means to support the strategy. 

Investor B could only participate in the If-come strategy because he was able to afford the holding costs while waiting for capital growth to occur.  While a market is identified as a capital growth market, it’s hard to predict exactly when the growth will occur.  Sydney and Melbourne experienced flat growth for 10 years prior to the recent spike in growth which has occurred over the recent years.

If Investor B was earning a lower income, he may not have been able to afford the initial out of pocket costs needed to participate in the

‘If-come strategy” or may have perceived the shortfall to be a bad investment option – which is the opinion of many positive cash-flow “Income strategy” investors.

If the costs of holding an asset put you under financial strain, then you may be forced to sell before the market increases in value. With entry and exit costs, you might find yourself financially more disadvantaged than where you started.

This demonstrates the importance of always considering the exit strategy from the outset.

So which is the best strategy for you?

Everything needs to come back to what suits your needs, financial situation and goals. Your personal circumstances need to be in line with the chosen investment strategy.

If someone is pushing one strategy as ‘the best’, you need to dig a little deeper to find out what their agenda is. 

Often you will find that they sell only a certain type of property and are keen to push the positives – without making you aware of the negatives.

At We Find Houses, we don’t advocate any particular strategy as “the best” one because every situation is unique. We don’t adopt or support cookie cutter strategies, as our aim is to help you find the best property for your situation.

We excel at helping you define your personalised investment strategy according to your goals and situation, and locate properties that match.

As you progress through your investment journey, your circumstances will vary inevitably change over time and as a result your strategy needs to adjust accordingly. We help you review, adjust and maintain your momentum every step of the way.

If you are new to property investing and want to get clarity around a strategy that will get you started on the right foot, or if you own properties and would like to have their performance reviewed while renewing your strategy, discover how we can help you by booking a free strategy consultation direct with certified property investment advisor Paul Wilson (or put a box to click and put in info)

Feel free to also download one of Paul’s e-Books  called Why 2 out of 3 Positive Cash-flow Properties Are Not Worth Touching.

5 things you shouldn’t do when refinancing your home loan

Refinancing your home loan is must – especially if you’ve been stuck on one rate or package for over three years. 

IN THE TIME YOU HAVE TAKEN OUT YOUR HOME LOAN (SINCE 2013), THE OFFICIAL RBA CASH RATE HAS DECREASED A WHOPPING 100 BASIS POINTS – FROM 2.75% TO 1.75%. THIS REPRESENTS SIGNIFICANT SAVINGS, IF WE’RE LOOKING AT INTEREST RATES ALONE. NOT EVERY HOME LOAN IS EQUAL, LIKEWISE NOT EVERY REFINANCING IS EQUAL. YOU SHOULD KNOW AS MUCH AS YOU CAN BEFORE CONSIDERING REFINANCING. HERE ARE FIVE THINGS YOU SHOULD NOT DO WHEN LOOKING TO REFINANCE YOUR HOME LOAN.

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1. Stay with your current lender “just because”

Most of us aren’t business people, and don’t think of our home loans in the same way. A lot of us stay with our current lenders because we don’t want to rock the boat, are too scared that refinancing must cause problems or is too much of a hassle. If you aren’t satisfied with your current lender, there is a lot of competition for your business. Don’t make a decision based on personal feelings – your financial well-being is your responsibility. If your current lender doesn’t make an effort to keep your business, they likely don’t deserve it.

2. Look well before your current term is up

If you have just signed a home loan deal within two years, you should not look to refinance for another year or so. You should know when your current term is up and begin to research potential lenders at that time, not before. If you choose to refinance before your current term ends, your current lender might hit you with whopping exit fees that negate any initial savings you might make by switching lenders. Plus, the market is always changing – don’t lock yourself into something you may regret later.

3. Refinance with the lowest interest rate you find

Some might think finding the lowest home loan interest rate is the aim of the refinancing game, but in reality, it’s only a small part of it. You should be looking at comparison rates – interest rates combined with most of the fees you’ll pay over the life of a loan – over base interest rates. Other home loan refinancing options might be better suited to your goals, even if they have slightly higher interest rates. You may want a refinancing package that offers offset accounts or lines of credit. Others might be suitable for venturing into the investment property market. Don’t assume that the lowest rate is the best home loan.

4. Apply with many different lenders

One common mistake is applying with a great deal of lenders and brokers to find the best deal. The more you apply, the more often a lender or broker conducts a credit check. You shouldn’t allow a lender or broker to conduct a credit check until you’re certain you want to pursue the offer on the table. More credit checks, more often actually harms your credit history and may lead to rejection or less than ideal interest rates.

5. Accept a deal with a great “honeymoon” rate

Banks and lenders know that it’s a competitive market for mortgages out there, and offer people and families enticing “honeymoon” rates that balloon out to bigger rates after a certain period (such as 12 months.) Don’t fall for “honeymoon” rates, as they could end up costing you much more in the long-term. The aim of refinancing is to reduce interest and if possible, your overall term. Short-term gains are not worth the trouble, risk and extra long-term costs.