Negatively gearing an investment property is an excellent way of structuring your affairs to minimise tax while simultaneously setting yourself up for a capital gain on the property's eventual sale. To maximise the tax benefits of negative gearing, you need to maximise your deductions. Here are 3 investment property tax deductions many investors forget to include when submitting their returns to the Australian Taxation Office (ATO).
Most investors know that they can claim interest on borrowed funds as a deduction against their rental income, but did you know that you can claim a deduction for interest that is prepaid up to 12 months in advance? By prepaying the amount of interest that your loan is expected to accrue for the next financial year, you can bring forward that deduction on to your return for the current financial year, which can be handy if you would otherwise be facing a hefty tax bill.
Be careful to only prepay 12 months of interest in advance in any one financial year, though. According to the ATO, prepaid expenses covering a period of more than 12 months may need to be split over two or more years.
Capital works depreciation
Again, most investors know that they can claim deductions for the decline in value of depreciating assets such as air conditioners, carpets and hot water systems. However, the cost of constructing your investment property may also be claimed as a deduction, even if you are not the original owner. CPA Australia advises that, generally, deductions for the cost of constructing properties built after 15 September 1987 can be claimed at a rate of 2.5 percent per year for 40 years. Note that if you do not have a record of the construction costs, for example where you purchased the property 'second-hand' and the vendor did not provide the relevant documents, you will need to engage a quantity surveyor to prepare a capital works schedule.
To learn more about depreciation schedules, contact your tax accountant.
Good landlords like to check on the state of their investments from time to time, and the cost of travelling to your investment property to carry out an inspection can be claimed as a deduction. According to Your Investment Property Magazine, many landlords overlook this potential deduction, especially if they live in the vicinity of their property. The ATO advises that landlords need to keep written records of their travel, and if the purpose of travelling to the area where your investment property is situated is not wholly for the purposes of carrying out an inspection, you will need to reduce the amount of your deduction accordingly.
While negative gearing is an attractive way to minimise tax and build a nest egg at the same time, the rules around what you can and cannot claim are complex. The ATO has recently stepped up its scrutiny of rental property investors doing the wrong thing, so if in doubt, check with your accountant or tax agent.