One feature of the current growth in the residential market, particularly with the number of new apartments being built, is that there are many first time landlords who need to quickly learn the financial opportunities and obligations that go with the role, says Peter Bembrick, tax partner with accountants and advisers HLB Mann Judd Sydney.
“The tax issues involved in direct property ownership can be very complex but, if correctly managed, along with other costs, can be significantly reduced.”
“Many of these issues need to be considered before purchase, such as ownership structure. For example, if a couple are joint owners, there is usually most tax benefit if the property is owned in the name of the highest income earner.”
Mr Bembrick said that other issues that should be considered from the outset include:
“How costs must be allocated for tax purposes can also have a significant effect on how income tax is, or isn’t, affected,” he said.
“For example, some work on a property will be regarded as capital improvements and cannot be used as an income tax deduction, but instead is added to the cost base of a property and will affect any Capital Gains Tax (CGT) that is due when a property is sold.
“Examples of capital improvements would include a new hot water system or installing air conditioning.
“However, items seen as repairs or maintenance, such as replacing a broken tap, replacing a rotted timber deck, repainting, or the cost of a gardener if this is the landlord’s responsibility under the lease agreement, are deductible against income.
“While capital costs may not be deductible against income, it is critical to keep complete records from the day a property is purchased until the moment it is sold to calculate and prove the true capital cost for CGT purposes.”
Mr Bembrick said that landlords are affected by three levels of tax – Local, such as council and water rates; State, such as the possibility of land tax (an annual tax that can be overlooked by landlords); and Federal taxes, which have been touched on here, but may also include GST in some circumstances.
“Landlords need to know what these taxes are likely to be so that they can plan their cash flow and ensure they can meet expenses when they are due.
“They also need to know what is deductible against income, such as water and council rates and land tax and keep appropriate records for their annual tax returns.
“If a landlord appoints an estate agent to manage a property, these costs are also deductible.
“Costs of travel to inspect the property can be deductible with some limitations.
“New landlords should make sure they inspect their property at least once a year and whenever tenants move out.
“Insurance is also a necessary cost, but again is deductible against income.”
Mr Bembrick warns that while negative gearing considerations can make an investment property seem an attractive proposition, reducing tax from other income should not be the sole reason for investing in residential property.
“Losses from negative gearing are still losses and positive, or neutral, gearing always has to be preferable.
“Residential property investing for capital growth, especially in the current market, has to be a long term proposition, and in the shorter term, when interest rates inevitably rise there could be serious cash flow problems to face.
“Owners don’t want to be in the position where they are forced to sell at a loss because they can’t meet the holding costs.”
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
17 September 2014