Tax hurdles tripping up property investors

INVESTORS own around two million homes in Australia and every year thousands claim deductions they’re not entitled to and fall foul of the Australian Taxation Office.

The result can be a kind warning or a significant fine and large interest bill.

The tax office says investors’ should be responsible in getting their tax returns right and they can’t blame their accountant or plead ignorance if they get it wrong.

One of the most common mistakes investors make is claiming items that should be depreciated over several years.

According to the ATO, initial repairs to fix damage, defects or deterioration that existed when a property was bought are capital expenses that should be claimed as capital-works deductions over either 25 or 40 years.

Capital improvements such as re-modelling a bathroom or adding a pergola should also be claimed as capital-works deductions.

Other mistakes can include:

Interest

Taxpayers sometimes use loans for investing and private purposes — for example, to buy or renovate a rental property or to buy a motor boat.

The interest expense on the private portion of the loan (the boat) is not deductible!

Legal expenses

Conveyancing expenses incurred when buying and selling a property are not deductible. These form part of the cost for capital-gains tax purposes.

Travel expenses

If you take a holiday and visit your investment property while you’re there, you cannot claim a deduction for the full trip.

The tax office says you may claim only those expenses directly related to the property inspection and a proportion of accommodation expenses.

TUMBLING interest rates have opened the doors for investors

Industry advisers say the combination of falling interest rates and rising rents have presented a once-in-a-generation opportunity to invest in the property market. Mortgage rates have fallen from an average of about 9.25 per cent to 6.9 per cent, and some financial experts predict official interest rates will fall to 3.25 per cent by the middle of 2009.

At the same time, the recent fall in property prices in major cities has seen rental yields as high as 4-5 per cent on well-located properties.

While many property investors are tempted to sit back and wait till the market bottoms out next year, some property experts say the time to buy is now.

The Real Estate Institute of Victoria also advises it is a good time to invest.

REIV president Adrian Jones said that for the past two years rental vacancies had been hard to find in Melbourne, a sure sign that investors could achieve a decent return.

It is also a buyer’s market, making it easier to find and afford an investment home.

“The cost of borrowing has fallen substantially but returns on investment, the rental paid by tenants, has not,” Mr Jones said.

Finally, Melbourne has a growing population, which will translate into growing demand for housing.

Read the full article here: http://www.news.com.au/heraldsun/story/0,21985,24764359-5013926,00.html

Paul Castran