If you want to maximise your returns from property, here are five rules that will help you take advantage of all the tax breaks. Of course, never buy just for the tax perks. Good property selection is first and foremost.
Buy new for the big depreciation benefits still available
Investors in residential property bought after May 9 2017 (the date of the 2017 Federal Budget) will no longer be able to claim depreciation on plant and equipment assets installed at the time of settlement. Investors who purchase a new property will be able to continue to claim these items as they could do previously. An example from tax depreciation specialists BMT shows that an investor who pays $650,000 for a new unit after that date will continue to receive $58,811 in depreciation claims over the first five years whereas one who pays the same for a three year old property will see their five year depreciation claim fall from $56,114 to $35,775.
Buy property in different States to save on land tax
The State based tax is levied on the unimproved land value of an investment property. For property investors planning on building property portfolio, you could reduce your land tax bill to zero, plus enjoy the benefits of a diversified portfolio.
Apply for your tax refund pro rate in every pay cycle
Get your property tax breaks every pay day rather than waiting to collect a lump sum after you have lodged your tax return for the previous financial year. This suits investors who are subject to normal withholding tax from their weekly pay and have a tight cash flow. To do it you need to lodge the very formal sounding “PAYG withholding variation” application with the ATO. This means, in effect, that you have to forecast your entire income and expenses for the upcoming financial year. The ATO will then inform you and your payroll office of what the varied tax rate will be. This process must happen each year.
For example, Joanne earns a $75,000 a year from her regular job as a teacher. She’s also a property investor and estimates her loss from her rental property to be $25,000 this year. This means her estimated income falls to $50,000. Joanne can apply for a variation to her withholding rate calculated on the basis of $50,000 income, reducing the amount of tax withdrawn from her weekly income from $306 to $150, putting an extra $156 in her pocket each week.
Obtain your depreciation reports after settlement
You need depreciation reports for your investment properties so you can claim all the tax breaks you’re entitled to. Get them straight after settlement, if possible, that way the quantity surveyor will see your property in the true state in which you have purchased it. The good news is you only need to have the depreciation schedule prepared once and its cost is tax deductible.
Don’t hold your vacant land after July 2019
Don’t hold vacant land after July 2019, especially if cash slow is tight. From that date, deductions will be denied for expenses associated with holding vacant residential or commercial land. The move announced in the 2018 Federal Budget means deductions associated with holding land will only be available once a building has been constructed and is available for rent.