Tax hurdles trip up property investors

INVESTORS own around two million homes in Australia and every year thousands claim deductions they’re not entitled to and fall foul of the Australian Taxation Office.

The result can be a kindly warning or a significant fine and large interest bill.

The tax office says it is investors’ responsibility to get their tax returns right and they can’t blame their accountant or plead ignorance if they get it wrong.

One of the most common mistakes investors make is claiming items that should be depreciated over several years.

According to the tax office, initial repairs to fix damage, defects or deterioration that existed when a property was bought are capital expenses that should be claimed as capital-works deductions over either 25 or 40 years.

Capital improvements such as re-modelling a bathroom or adding a pergola should also be claimed as capital-works deductions.

Other mistakes include:

Interest

Taxpayers sometimes use loans for investing and private purposes — for example, to buy or renovate a rental property or to buy a motor boat.

The interest expense on the private portion of the loan (the boat) is not deductible.

Legal expenses

Conveyancing expenses incurred when buying and selling a property are not deductible. These form part of the cost for capital-gains tax purposes.

Travel expenses

If you take a holiday and visit your investment property while you’re there, you cannot claim a deduction for the full trip.

The tax office says you may claim only those expenses that are directly related to the property inspection and a proportion of accommodation expenses.

Renters …buy now!!

Increasing rents have boosted the housing component of the Consumer Price Index (CPI) by   0.9 per cent for the quarter and the overall annual increase to 5.5 per cent, that’s according to Australian Bureau of Statistics (ABS) figures released this week.

The CEO of Real Estate Institute of Australia has said, “The majority of this increase in the housing component was driven by rents, which increased nationally by 1.7 per cent over the quarter and 8.4 per cent over the year. The cities where rents increased the most were Perth and Darwin with annual increases of 10.9 per cent and 13.5 per cent respectively!”

This rent increase in the recent quarter reflects low vacancy rates and the scarcity of rental properties across capital cities, combined with the decrease in building approvals and housing finance for investment.

The National Rental Affordability Scheme should hopefully relieve this figure, however the impact won’t be felt for quite some time.

“With underlying demand for additional housing at around 200,000 dwellings per year and commencement of new dwellings of 147,000 in 2008, Australia will need to build significantly more houses than what has occurred to meet rental demand.”

Whilst housing affordability improved since the Reserve Bank rate cuts, there’s really been very little   flow-on benefit to those in the rental market.

“With lower interest rates and greater affordability, now would be an almost perfect time for those in the rental market to consider the purchase of their own home.”