Top tax slips property investors must avoid

Tax time can cause great anxiety for investors who unwittingly make claims they are not entitled to, getting themselves into deep water with the Tax Office. Here are some helpful hints to assist property investors to capitalise on their allowable deductions and avoid unwanted interest from the tax man.

Property is an increasingly popular form of wealth creation for many Australians, but often they lack the accounting and financial knowledge to know what it is they are entitled to claim, or how much they can claim and what is not an accepted tax deduction.

The ATO monitors property investor claims and often issue warnings or notices of the types of common mistakes made, so investors should at least visit the ATO website.

Reports say more than 1.5 million people claim in excess of $24 billion in rental deductions in a year, which explains the ATO’s vested interest and continued focus on monitoring rental property deductions.

The most common mistakes made by property investors include making claims against:

• Immediate initial repairs or capital improvements including structural repairs and improvements which are seen more as capital works deductions such as remodeling a bathroom or building a pergola
• The portion of a loan that is used for both investing and private purposes
• Inspection of a rental property while on holiday in the area, which is the real purpose, and the inspection only incidental
• Expenses relating to the private use of a property such as a holiday home
• A property that is not genuinely available for rent including periods while it is undergoing construction or renovation
• Borrowing expenses in the first year rather than being spread out over the term of the loan or five years, whichever is the lesser of the two.

Investors should seek the services of a qualified professional such as an accountant or financial advisor when looking at preparing their tax return.

Everyone’s personal financial circumstances are different and the tax implications of the individual property investment strategy may differ, so it is important to discuss it with someone who has the necessary expertise and experience.

It is also a good idea to look at using the services of a respected and qualified property manager who will act on your behalf with your best interests at heart.

A property manager will have the requisite forms, processes and systems to effectively manage a property as well as maintain and keep appropriate records for tax and accounting purposes.

Proper record keeping and tracking is more than half way to ensuring the investment property yields the optimal return.

Ray Ellis is CEO of First National Real Estate.