By Maria Milillo, National Manager, Property Management, Raine & Horne
Just because the last financial year has come and gone, it doesn’t mean there are not some strategies you can put in place to help set you up for tax year 2020/21. Besides, some of these strategies might even help reduce the tax you owe from last year.
Research from BMT shows 80% of property investors fail to take advantage of property depreciation at tax time and therefore miss out on thousands of dollars in their pocket.
Landlords regularly overlook depreciation because it is a non-cash deduction, meaning you do not need to spend any money to claim it. A few years ago, for example, BMT found an average first-year deduction of almost $9,000 for property investors once they obtained a depreciation schedule.
A comprehensive depreciation schedule will help support any deductions you claim for the wear and tear of structures and assets in your rental property. Plus, for those who have not been claiming depreciation, a depreciation schedule can help you claim back missed dollars from the previous couple of tax years. Moreover, the depreciation schedule is tax-deductible, and you can claim this expense in the 2020/21 tax year.
When it comes to claiming tax deductions, there are differences between repairs and maintenance and capital expenditure.
This is an important distinction to make, especially if you are considering some improvements to help attract a tenant now.
When you fix the wear and tear or damage to your investment property because of renting it out, the ATO calls this a repair — replacing a broken kitchen door is an example of a repair according to BMT. Maintenance generally involves keeping the property in a tenantable condition. BMT says the ATO classifies the painting of an interior wall as maintenance.
A capital improvement occurs when the condition or value of a property or associated plant or equipment is enhanced beyond their original condition at the time of purchase. An example of a capital works improvement is a structural addition such as a new interior wall or a renovation. Meanwhile, adding removable or mechanical items such as new carpet, hot water systems and stoves are considered plant and equipment, BMT advises.
With the definitions out of the way, repairs and maintenance costs for a rental property may be fully tax-deductible in the year they were incurred – so if you’ve haven’t passed on the receipts for a repair from the last tax year to your accountant, do it now!
Capital improvements, on the other hand, must be depreciated or claimed as capital works deductions over time. If you made some capital works improvements last year, a depreciation schedule could help you start to claim for this work, and reduce your tax bill from last year into the bargain.
If you feel you need some advice regarding your rental property, be sure to consult our office or your accountant.