Real Estate “Tax Break Traps”

Money reader Anna had a bad experience last year when she was audited after claiming capital work costs on a recently acquired investment property as immediate deductions. “I bought an investment unit and I carried out some repair and painting works and totally replaced the bathroom before I tenanted it, so I could charge a higher rent,” says Anna. “I thought I could write the cost of these works off as an immediate deduction.” Wrong, as Anna discovered. She could only claim these costs as capital works over a period of years. Anna also claimed the costs of buying the property, including stamp duty. This was also knocked back.

These costs can only be brought to account when you sell your investment property and work out the cost base for capital gains tax. Another common mistake landlords make, says the ATO, is to use a loan facility for both private and investing purposes – for example to buy a new car and an investment property – and to claim the total interest cost as a deduction. Only the interest payable on the property can be deducted, which is why it’s necessary to have a split loan. Travel expenses inspecting an investment property some distance from where you live can cause problems if you combine it with a holiday.

You can only claim expenses that directly relate to looking over your property. If you buy a rental property as a co-owner, you must divide the income and expenses of the property in line with your legal interest in it. And if you have a holiday home that you rent out at times, only claim deductions for the time it is available for rent. “It is also important you have a clear intention to rent the property. If you made no attempt to advertise or set the rent so high it is unlikely a tenant could be found, we would find that you had no intention of renting your property and your rental claims would not be allowed,” the ATO says. Common mistakes include claiming deductions for any expenses related to your private use of the property. When it comes to claiming your full depreciation allowances, it’s important to obtain a depreciation schedule from a reputable quantity surveyor. Costs vary but many firms, such as Washington Brown, guarantee that unless you save at least twice your fee in the first year the report will be free.

Article from June 2011 Money Magazine

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