August 26, 2021
Are you a property investor? Here’s the tax information you need to know
One of the most important aspects about investing in property is ensuring that you maximise your return on investment. However, while both repairs and renovations can be claimed as tax deductions, it’s vital to know how to do so correctly or else it can be costly and unlawful.
Rental property improvements are an investment that pays off in the long run. If you make any changes to your rental property, such as improving or upgrading a doorframe, bathroom faucet, flooring material etc., it is considered a renovation and must be claimed with depreciation. This means that you are claiming a deduction for the decline in value over the effective life of your investment.
Maintenance and repairs however can be claimed differently, when all records contain accurate information on that work. This will assist in working out the depreciation of assets of the property.
A depreciation schedule can help you to save thousands of dollars in taxes by claiming tax depreciation deductions at the end of each year for a residential investment property or commercial building. The process is simple, and if done correctly will provide a fuller picture for your tax return that could lead to substantial savings.
Investors who renovate and lodge their tax returns before ensuring that they have updated their tax depreciation schedule correctly could get caught out in making a mistake between renovation and maintenance work. The Australian Taxation Office encourages you to be careful of what you claim and when, otherwise your costs for renovations could come back to bite you
If a taxpayer does not record their rental property improvements in a tax depreciation schedule correctly then they are risking making inaccurate claims which invites scrutiny from the ATO. It is important that taxpayers make sure that any work undertaken on an investment property gets recorded properly at all stages so as not avoid wrongly claiming deductions or incurring penalties if projected lease receipts fail to meet expectations
When renovating your house, tax obligations and entitlements may change. Whether you are a personal property investor or business owner with renovation projects, there are certain requirements that differ depending on the type of ownership status for these activities outside of maintaining depreciation schedules.
Personal property investor
As a personal property investor engaging in renovations to your own home, you might be eligible for tax concessions. For example: the net gain or loss gained from the renovation is treated as a capital gain or capital loss and can potentially reduce any other taxes owed; capital gains tax discounts may also apply. You will not have to register for GST either because it’s an investment within one industry (property).
Profit-making activity of property renovations
Consider yourself a property ‘flipper’? You will be required to report your net profit or loss from the renovation in your income tax return as a result of this profitable activity. This is essential if you are thinking about participating in property flipping, because it could mean that more taxes come into play. You will need to have an Australian business number and may have to register for GST if your renovations are substantial.
It’s worth noting that if you’re selling taxable Australian property you may have to apply for an ATO clearance certificate.
In the business of renovating properties
Are you carrying out the business of renovating or flipping properties? If so, keep these points in mind. The properties are regarded as trading stock (even if you live in one for a short period of time). The costs associated with buying and renovating them form part of the cost of your trading stock until they’re sold. Annual profit and loss is calculated similarly to any business that deals with trading stock. You’re also entitled to an Australian Business Number and you may be required to register for GST on renovations which are substantial (usually more than $50K).
In this instance, CGT does not apply to assets held as trading stock. Similarly, the CGT concessions (such as the CGT discount, small business concessions and main residence exemption) will not be applicable to the income gained from the sale of the properties.
The tax implications of renovating a property are different for personal and business investors. As a property investor, you need to be careful with what you claim, and when. If you’re renovating your personal home, then there may be some perks that come with it like capital gains taxes and GST discounts. However if you’re investing in properties as a business, the situation is more complicated and could involve higher costs than anticipated.
If you want to know more about claiming property improvements on your tax return, get in touch with us for advice.