Welcome to our FY20 Real Property Matters Investment Property Checklist. What a year it’s been. It started with a new look Liberal government led by Prime Minister Scott Morrison, who managed to hold out a red hot favourite Labor opposition that campaigned on reforms around negative gearing.
While this played out, parts of the country were experiencing terrible natural disasters, including droughts, floods and bushfires.
We moved into 2020 with renewed optimism: the government was bringing the budget back into surplus and the country was heading in the right direction. However, it wasn’t long until the world was overcome by the COVID-19 pandemic. I’m not sure anyone could have imagined the financial and employment impact of the virus.
So, what effect does COVID-19 have on the property investment sector? With the unemployment rates skyrocketing, tenants struggling to meet their rent, international travel at a standstill eliminating international students’ housing needs and restrictions around open homes, the property market has been challenging. However, it has also presented some great opportunities.
As many of us are now working from home, in this year’s checklist we’ve provided you with some great tips and advice on expenses you may be able to claim. We have also touched on how to ensure your property is adequately protected in the event of a natural disaster and discussed the difference between property repairs and improvements.
I hope you enjoy the read, and find it useful in these times.
Regards
Rob Toole
Managing Director
Real Property Matters
IS IT TIME TO RENT OUT YOUR SPARE ROOM?
Your home or primary place of residence (PPOR) does not offer you tax benefits, but if you decide to rent out your spare room, that all changes. The additional rent is regarded as assessable income.
To counteract that, the good news is you can also claim deductions! These include interest on your mortgage, council rates, and repairs and maintenance. Completing a tax depreciation schedule is also an option in claiming back wear and tear.
The percentage of your claim is based on the area that is being leased, i.e. claim the entire area of the bedroom, and apportion the communal areas.
In this scenario, a tax depreciation schedule will determine the total depreciation deductions available. Your accountant, working in conjunction with Real Property Matters, can apportion you the percentage to claim.
A tip to increase your available depreciation deductions would be to provide the room fully furnished with brand new furniture and fittings.
IF THE THOUGHT OF LIVING WITH A TENANT DOESN’T EXCITE YOU, IS MOVING INTO YOUR INVESTMENT PROPERTY AN OPTION?
LIVING IN YOUR INVESTMENT PROPERTY
There are a myriad of reasons why you might consider moving into your investment property. One might be the investment property is in need of an upgrade and living through the renovations, instead of reducing rent, could be a more economical option.
If you do move into your investment property, it will now need to be declared as your PPOR for tax purposes and, unfortunately, you will need to stop claiming all the previous deductions.
If you decide to rent out your previous PPOR, you can be exempt from CGT for a period of time up to six years.
If you are also in a position to consider more than one property to be your PPOR within a six month period there can be further exemptions to avoid a CGT event. To be eligible you must meet one of the following two conditions.
Renovation work is broken down into two main areas:
CAPITAL WORKS (kitchen cupboards, splash backs, bathroom tiling, painting, floor polishing, patio improvements etc) are capital in nature and will depreciate at a rate of 2.5% per year over 40 years. Depreciation is available at the full cost of the improvements.
PLANT AND EQUIPMENT (carpet, curtains, kitchen appliances, hot water service etc) have varying lives of depreciation. To maximise your annual depreciation, install the items after moving out of the property before the tenants move in.
IF YOUR WORK IS NOT PERMANENTLY BASED AT HOME, YOU ARE UNABLE TO CLAIM OCCUPANCY EXPENSES, REGARDLESS OF WHETHER YOU HAVE A WORK AREA SET ASIDE OR NOT.
With so many of us working from home, it’s important to know what expenses we can claim and how we go about doing this. The Australian Tax Office (ATO) knows that tracking expenses can be difficult, so they have introduced a shortcut method where an hourly rate can be used.
The ATO has separated expenses into either running expenses or occupancy expenses. Below is the general criteria that applies when claiming and substantiating these working from home expenses.
Your individual situation determines if you can claim both of these categories of expenses.
Remember to keep accurate records of the period you have been working from home - and if you are claiming using either the actual cost method or the fixed rate method, you will need to keep further details of the expenses to demonstrate how you have calculated your claim.
If you need assistance in calculating the depreciation on the areas you are utilising as your home office, please get in touch with the team at Real Property Matters.
This is a stark reminder that having an appropriate level of insurance is essential when protecting one of our biggest eNews/assets.
An accurate building replacement cost would take into consideration the following:
A PROFESSIONALLY PREPARED BUILDING REPLACEMENT VALUATION IS VITAL TO ESTABLISH AN ACCURATE REPLACEMENT COST
In the event that an investment property is damaged, the owners may be entitled to additional tax deductions on the building and contents. If an insurance payout is provided, a balancing adjustment will need to be calculated for the destroyed eNews/assets. A balancing adjustment is found by comparing the value paid out by the insurance company and the original value of the item less any depreciation.
BALANCING ADJUSTMENT = INSURANCE PAYMENT MINUS ORIGINAL VALUE LESS ANY DEPRECIATION
Property investors earning income when the balancing adjustment is done and the payout figure is less than the original value minus the depreciation, will be entitled to a further tax deduction.
Alternately when the balancing adjustment is done and the payout figure is greater than the original value minus the depreciation, that additional income must be included as income in your tax return.
Having an up-to-date tax depreciation schedule is critical when claiming wear and tear on the property. It also ensures any value left on damaged eNews/assets can be claimed by property investors.
Many property investors self-assess their tax returns and subsequently make a few errors. The ATO recently reviewed a sample of individual tax returns and found errors in the majority of the claims. We have identified the top 10 areas to concentrate on when completing your tax return.
If you borrowed money to buy your investment property, you are entitled to claim the interest component as a deduction. Additionally, if you require additional finance to upgrade the property (finance a solar system/air conditioning unit etc) then the interest component on the additional finance is also an allowable deduction.
2. REPAIRS AND MAINTENANCESome maintenance expenses can be offset when you lodge your tax return, but other improvements need to be claimed back over a period of years.It is essential to understand the difference between repairs and maintenance, and improvements to ensure you are claiming correctly, especially with the ATO ramping up their audits and penalties for incorrect claims. For further information please refer to the following article - Is now the time to Spend Money on your Investment Property?www.realpropertymatters.com.au/is now the time to spend money on your investment property
3. PROPERTY DEPRECIATIONA tax depreciation schedule (TDS) will reduce your taxable income and also identify all the depreciable eNews/assets in the investment property, allowing you to claim the wear and tear back as a deduction. The cost of the TDS is also tax deductible.
4. BORROWING EXPENSESBorrowing expenses include loan establishment fees, title searches and filing the mortgage documents. The ATO outlines if your total borrowing expenses are greater than $100, the expenses can be spread over the next five years. If the expenses are under $100, you are entitled to deduct this amount in the year that payment has been made.
5. PROPERTY MANAGEMENTGood management of your asset comes with a cost! The fee that you get charged from your property manager is tax deductible and should be included in your claim.
6. LAND TAX AND COUNCIL RATESDon’t forget to include any land tax, council rates, and body corporate fees that you have paid throughout the year. Claim these expenses in the same year you paid for them.
7. PEST CONTROLWe all try to protect our investment properties, so that annual pest inspection is on the hit list and it can generally be claimed as an immediate deduction.
8. INSURANCERemember to include all your building, contents, landlord and public liability insurance in your tax claim.
9. LEGAL EXPENSESA property investor is entitled to claim any expenses involved in evicting a non-paying tenant, including taking court action for loss of rental income.
10. ADVERTISING COSTSIf you were required to advertise the property, the professional photos, printing and advertisement are all claimable and should be claimed in the year that the payment has been made.
All properties require money and work to maintain their condition. Some of these maintenance expenses can be offset when you lodge your tax return (e.g. claimed back immediately), but other improvements need to be claimed back over a period of years.
It is essential to understand the difference between repairs and maintenance, and improvements to ensure you are claiming correctly, especially with the ATO ramping up their audits and penalties for incorrect claims.
So, what is the difference and how does it affect your decision on where to spend your hard earned money?
REPAIRS AND MAINTENANCEIf the patio at your property has deteriorated and requires repair, e.g. replacing some of the timber flooring, this would be classified as a repair and maintenance item. The work is simply completed to fix an existing item.
These types of expenses can be claimed entirely in the financial year in which they occurred.
CAPITAL WORKS VS. PLANT AND EQUIPMENT ITEMS
Capital improvements could include updating the bathroom tiles, replacing the kitchen cupboards or giving the property a simple lick of paint. These types of improvements are classified as capital by nature and depreciate at 2.5% over a 40-year period.
Plant and equipment items include both removable and mechanical items including curtains, carpet, cooking appliances and hot water systems. These items depreciate at an accelerated rate and generally range between five to 20 years.
The ATO recently conducted a small sample of 300 audits completed on rental property claims. Errors were found in almost nine out of 10 returns reviewed.
With the ATO focusing more on property investors and their claims, our Real Property Matters team can help remove the uncertainty and make sure you are complying with ATO guidelines.
The attached table is an example of the type of work you may undertake on your property, including the tax deduction based on money spent.
| Item | Description | Cost | Depreciation Rate | Claimable Amount |
|---|---|---|---|---|
| Painting | Internal and external painting | $3950 | 2.5% | $99 |
| Patio | Replace damaged boards | $1490 | 100% | $1490 |
| Carpet | Replace bedroom carpet | $1890 | 12.5% | $236 |
| Garage Door | Fix automatic door | $340 | 100% | $340 |
| Ceiling Fan* | New bedroom ceiling fan | $260 | 100% | $260 |
Don’t forget about your Individual Income deductions. The following is a simple checklist outlining some of the major income streams and the deductions that you may be entitled to.
Generally, if you need to spend money to earn income, you can usually claim it (as an immediate deduction, or over time).
EXPENDITURE FOR THE PERIOD 1 JULY 2019 TO 30 JUNE 2020 EMPLOYMENT EXPENDITUREMotor Vehicle Expenses can only be claimed when the motor vehicle is required to be used in order to carry out your employment duties. Travel from home to work and work to home is generally classified as private travel. There are several options available when claiming for motor vehicle expenses:
If claiming under either the log book method or 1/3 of total expenses you will require the following:
THE FOLLOWING WORKSHEET WILL ASSIST YOU IN CALCULATING YOUR INVESTMENT PROPERTY’S NET RENTAL INCOME OR LOSS. WE TRUST YOU WILL FIND THIS WORKSHEET A BENEFICIAL TOOL IN ASSESSING THE NET RENTAL INCOME OR LOSS OF YOUR RENTAL PROPERTY.