For a long time, landlords across Australia have been paying more taxes on their rental income than necessary. The reason being is that people fail to take advantage of all the tax deductions available for owners of said rental property. In some cases, real estate provides more tax benefits than most other types of investment. With knowledge and action, every property owner can benefit from special opportunities to deduct expenses related to real estate taxes. Any advantage taken can help us save more money faster so we can accelerate the investing process. Basically, it is a way of increasing our return on investment ratio more in our favour. Here are some basic ways of getting the most out of real estate taxes.
First of all, what is considered to be rental income? It includes all amounts received as rent from occupants of the property in question. Also, income from all properties needs to be included. Rent received in advance, including the rent meant for covering a future year, must be disclosed in current year’s tax filling. If a twelve-month lease began in one year, it must be reported for the full amount, crossing into the next year. It is considered as rental income, in whole, for the current year we find ourselves in. On the other hand, security deposit funds are not included in a tax return. Except for in a case that we are keeping a part or the entirety of that sum, for whatever reason, do we have to report it as rental income for that year? So do other fees like rent payments, pet fees, parking lease and early cancellation fees, have to be included in a total rental income for that year. Finally, services that are received instead of money, must be included in the form of a fair market value of said services. For instance, if a tenant is an electrician and they offer to redo our electricity in exchange for a three-month rent, it needs to be included as rental income. Naturally, it amounts to the figure of a rent paid for in a three-month advance. These are some of the basics of what goes into an annual tax filling report. These points must not be left out to avoid any problems with the revenue services in the future.
Deprecation is probably the most important way of handling property taxes. It often offers the biggest deductions for rental property investors. It can reduce our taxable income without actually affecting our cash flow. One thing to note, land can never be depreciated. But the structure on top of it can. The basic premise is that the revenue services recognize that structures tend to deteriorate over time and therefore lose their value. If the age of your property has not been taken into account in its fullest, make sure to point out this important factor by providing details on when the property was built. Even though it may have not been visibly trampled by time and has been taken care of over the years, it still may qualify for a tax reduction. This is an important clause in a rock-solid depreciation report in Sydney. Also, that is why the majority of the purchase price should be allocated towards the structure rather than the land beneath it.
Maintenance and repairs
Rental property renovation, maintenance and repair expenses can qualify as repairs tax deductions. The more of these we qualify as repairs in the yearly tax form, the greater our deduction. Some of those deductions can include appliances, furnaces, air conditioning systems, electrical wiring, plumbing, etc. This also goes for the exterior, roof repairs, gutters, pools, windows, decks, lighting and of course, furniture all fall under a potential deduction. In short, you should always make the effort to note all of these repairs and renovations and add up as many deductions as possible.
In line with our previous point, proper and transparent record-keeping is mandatory. We always need to have appropriate evidence of our income and expenses so that we can claim everything we are entitled to. Capital gains tax may apply when selling a rental property. That is why keeping records over the period of property ownership and for several years after selling it is important.
Premiums paid for our rental activity can be deducted for almost any insurance out there. This encompasses fire, theft, flooding insurances for a rental property along with landlord liability insurance. Often enough, if you have employees, the cost of their health and worker’s insurance compensation insurance can be deducted.
Current and capital expenses
It is important to make this quick distinction. Current expenses include all the variable costs of doing business every day. These include, but are not limited to, insurance, maintenance, utilities, advertising, etc. Current expenses usually get deducted for the tax year they occur in. on the other hand, capital expenses include long-term, large-scale improvements or extensions of the life of a structure. These encompass renovations, remodelling, adding on a new structure on top of existing ones, just to name a few situations. Much like depreciation, capital expenses get deducted gradually over many years.
Home office deductions
In the case of you working from home, landlords may deduct their home office expenses from taxable income. Of course, certain minimal requirements need to be met in order for a home office to be classified and treated as such, so you will have to provide them. This can also apply for spaces like workshops and all other home workspaces that you are using in your rental business. This goes both ways, as it can be used whether you are a homeowner or a renter.
Tax deductions for rental property investors are aplenty and are great opportunities to save money. If you are unsure if you got all of them right, it is no shame to seek professional help in forms of accountants, attorneys, advisors and management companies of various kinds. The beauty of it is that even these fees can be deducted as operating expenses, as long as they are paid for work related to your rental activities.