With tax time just around the corner, it’s more important than ever to understand the dos and dont’s of property investment tax. Whether it’s something as simple as forgetting to keep the correct records, or something more trivial like not knowing the difference between maintenance and capital improvements, here are some of the most common tax mistakes made by property investors.
Confusing repairs, maintenance and capital improvements
There are three different types of renovations that can be carried out on your investment property. Firstly, repairs are defined as works carried out to fix damage and general deterioration sustained by your investment property; basically, they will restore your property to its state prior to the damages. Repairs on your Perth investment property are immediately tax deductible.
Secondly, maintenance is classified as work carried out to prevent damage and keep your property in its original condition. Maintenance is also immediately tax deductible.
Lastly, capital improvements are works that improve the state and value of your property and increase its life expectancy. These are not immediately tax-deductible; however, they are eligible to be claimed as capital works deductions, providing construction on your investment property began after 17 July 1985. Capital works deductions are generally spread over a period of 40 years.
Make sure you avoid this common tax mistake of confusing the various types of renovations by documenting your repairs and maintenance fees so that you can categorise them correctly at tax time.
Failing to keep the correct records
Keeping the correct records is essential if you plan to have a smooth sailing tax time. You will need to keep all records showing how much you paid for your Perth investment property, what income you received from it, and the expenses you incurred for owning and maintaining it. This includes:
- Bank statements and passbooks
- A copy of the purchase contract and all receipts for expenses relating to the purchase
- Records relating to capital gains tax
- Records of costs associated with owning the investment property such as interest, land taxes, and insurance premiums
- Costs of repairs and maintenance
Don’t forget that you need to keep these records for at least five years after your tax return has been processed.
Failing to claim depreciation
Depreciation is one of the biggest investment property tax deductions you can claim but failing to do so is also an extremely common tax mistake. A depreciating asset refers to an asset that has a limited life expectancy and therefore declines in value over time; examples include carpets, furniture, appliances and the structural elements of your Perth investment property.
In order to claim depreciation, a quantity surveyor will need to draw up a tax depreciation schedule for your investment property. This will include the surveyor assessing your property to estimate construction costs and carrying out a site inspection to assess the assets within your property. The report will then show you what you will be able to claim as property depreciation for the remainder of your assets’ lives. However, keep in mind that property investors can only claim property depreciation if the property was constructed after 15 September 1987.
Avoid tax mistakes with Rentwest Solutions’s expert advice
The best way to avoid these common tax mistakes as a property investor is by enlisting some professional help. Our expert property management team at Rentwest Solutions can help you with anything and everything, from knowing your tax deductions to keeping your records in order. We can also help by connecting you with trusted local tax accountants such as Rental Property Tax Accountants Pty Ltd, who are currently offering $50 off individual 2017/18 tax returns for Rentwest Solutions clients. For more information about our property management solutions or our exclusive offer with Rental Property Tax Accountants Pty Ltd, get in touch with our Perth property management team on 08 9314 9888 or email us at [email protected]