Whether you choose to manage your taxes in-house or you involve an outsourced tax agent, it's important to know, as a landlord, what rules apply to you so that you can avoid breaking them. However, the world of tax is complex and the rules change often, and so many property owners may be lost on certain aspects. This article clarifies some of these commonly-asked questions.
How do I deal with capital improvements and initial repairs on my property?
If you have an old property, you'll probably be making some upgrades or repairing certain parts over time. The rule of thumb with this is that capital repairs or upgrades must wait until the next reporting year before they can be claimed for tax deductions. In addition:
Claimable repairs should be traceable to damage resulting from tenant occupancy or normal wear and tear. Pre-existing damage (at the time of purchase) will be used to calculate taxable profit (capital gains) when you sell off the property.
Ongoing repairs, e.g. fixing damaged roofs can be claimed in the same year they are expensed if they are a result of tenant occupancy
If you replace an entire structure after partial damage, e.g. a roof, this becomes an improvement and not repair. Its deductible cost will be claimed at 2.5 percent over 40 years like other improvements
Replacement of damaged systems, e.g. hot water systems should be done over several years at a maximum of $300 per year
Is it wise to invest in an old building? Am I still able to claim depreciation?
Older properties are still allowed to claim tax depreciation after you invest in them. The ATO allows household items like ovens and stove-tops, carpets and blinds to depreciate very quickly, so you can claim most of these in the first year of purchase.
Even if you've owned the property for a number of years and hadn't factored in depreciation, it is possible to adjust your previous tax returns for all those years to show what depreciation you should have claimed. You'll use a tax return amendment form for this. Contact an experienced quantity surveyor to help you draw up your schedule so that you make the most of your allowable depreciation deductions.
How do I write off old building assets or equipment?
Sometimes you can acquire a very run-down property, looking to upgrade and then rent it out. The thing to note is that no matter how old a property is, there is still residual value in it. The stove-top still works, for instance. Before demolishing anything, consult a quantity surveyor to help you quantify the residual value of your claim so that you can write it off in one year. He/she will also help you to depreciate the value of the new equipment/asset over 40 years as required by law.