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Financial Analysis: Who Pays for your Investment Property?

Investment Property: Maximum Gain, Minimum Cost - Safely

If you’re a property investor are you aware of how to the get most from the tax deductions on your rental property? It's not only about claiming the right items, but how you claim and when you get paid can have a substantial impact on the profitability and cash flow of your investment.

Get the Financial Structure Right.

Careful consideration must be given to correctly structuring your property investment portfolio. Like any investment, the prime purpose of your property investment is to create wealth for you to use in the future. To be effective, this should be done at minimal cost and minimum risk to yourself, and be structured totally within your financial capacity. This also means, that it should maximise the amount of your investment that tax Deductions paid by the taxation system. If you are paying MORE THAN 20% of the costs of your property investment, the chances are you need to restructure your investment portfolio.

Tax Deductions & Expenses.

It’s important to be absolutely sure that your tax deductions are correct, because nowadays the ATO spends a great deal of time checking through investment property owners’ tax returns.

This ATO Rental property Guide will give you some idea of the expenses you can claim. However you should get advice from your accountant or financial adviser.

There are some expenses which you can’t claim - see your accountant for details. Keep a record of your costs as they should be added to the property’s cost base to determine whether you have made a capital gain or loss when you sell the property.

If you have been thinking of making improvements to your investment property it’s always worth remembering that repairs attract tax deductions against the year’s income.

Of course you should not take action purely to secure a taxation benefit. Rather, repairs should aim to improve a property’s ability to attract and retain tenants, achieve higher rental fees and make it stand out from other rental properties.

In making claims you need to be careful. The repair of a gas appliance for instance may be fully tax deductible whereas the purchase of a new oven may not. Depreciation is one of the areas which some people don’t take full advantage of when determining their deductions. This is not surprising since it can be a minefield determining what the latest rulings and qualifications are. For example, with a kitchen renovation, a new stove and range hood could fall under the category of a depreciating asset, with a depreciation rate based on a life of 12 years. Kitchen cupboards, on the other hand may be classed as capital works and therefore be subject to the low depreciation rate of 2.5%.

Compounding the problem is that it is sometimes difficult to determine what is regarded as a repair, which is treated as a straightforward deduction, and what is classed as a depreciable asset or capital works.

The best and recommended practice is to use a quantity surveyor to prepare a depreciation schedule so that you get your maximum benefit and than have your accountant prepare a tax variation for the ATO so that you realise the benefits of your deductions in your regular pay packet.

Depreciation specialists use their intimate, up-to-date understanding of tax laws and their construction costing skills to precisely determine what credits you are entitled to.

They will ensure that the maximum number of depreciable items is identified - anything from the dwelling itself to capital works such as fencing, paving and even the garden shed. And they will come up with a schedule which will clearly set out what you are entitled to claim for each depreciable item.

In all likelihood, you will be able to increase your tax deduction. It may surprise you but in some cases the tax benefits from depreciation could be as substantial as the rental income. This is particularly so with new homes. What’s more, you will save yourself a great deal of time and you will avoid having to answer persistent queries from the taxation office.

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