Property market update: make the most of tax time
The goalposts have moved
For the last few years, public dialogue on the property market has largely centered around rising property prices and a lack of affordable housing. As a result the government has introduced tax changes designed to make property investing less lucrative and encourage the availability of affordable housing for first home buyers. We’ve seen restrictions imposed on foreign and local investors with changes to capital gains tax laws, as well as restrictions on the number of foreign buyers in new developments limited to 50 percent. A drop-off in investor activity has spurred a resurgence of first home buyers who now represent 25 percent of the overall market. Government pressure on the investor market has resulted in significant reform over the last 2 years with buying, selling and even holding your property seeing significant shifts. Whether you’re a first time, veteran or international investor stay ahead of all the changes in 2019 and read on…
So what’s changed in 2019?
Measures have been introduced to limit local and foreign investor activity. Here are the key changes you need to know about which may impact your tax returns.
Deductions scrapped and limited
The government has discontinued tax deductions on travel expenses to investment properties. If you’re self-managing, this means that your costs of travelling to your properties has gone up, and the relative savings versus retaining a property manager have gone down. You can still claim tax deductions for engaging third parties to help you with your investment properties. The government has also restricted depreciation deduction claims. You can no longer claim income tax deductions for the decline in value of plant and equipment previously installed in a rental premises. So, if there are items in your new property purchased by a previous owner of the property, such as an air conditioning unit, oven, dishwasher or blinds, you can no longer claim on the items depreciation. Properties purchased prior to 10 May 2017 have been “grandfathered”, which means if assets are already on a depreciation schedule, you’ll be able to continue claiming.
Penalties for vacant properties
If you’re a foreign owner of a property which sits vacant for six months (183 days) of the year you will now have to pay a vacancy fee. The vacancy fee is part of the Australian Government’s comprehensive housing affordability plan designed to open the market to first time buyers. The cost of the fee is at least $5,500 but will vary depending on the amount you paid for your foreign investment application fee. In order to avoid the vacancy fee, you’ll need to find tenants for your property and a local property management service provider can find you suitable occupants.
Foreign capital gains tax changes and clearance requirements
Capital gains tax has increased for foreign investors who now have to pay a foreign resident capital gains withholding tax rate of 12.5 percent. The changes mean all owners whose properties are valued over $750,000 need to obtain a clearance certificate from the Australian Taxation Office (ATO) proving it is not foreign owned. Previously, this only applied to properties valued over $2 million. The law requires a clearance certificate for all land sales from $750,000 upwards so to avoid getting stung with this 12.5 percent tax you should apply to the ATO to obtain a clearance certificate before you list the property for sale.
Capital gains discount for affordable housing
Good news for investors and first home buyers alike. In an effort to encourage investment in affordable housing, the government has proposed to increase the capital gains tax discount from 50 percent to 60 percent for investments which qualify as affordable housing. The housing needs to be provided to low to moderate income tenants and rent needs to be charged at below market rates. A registered community housing provider must manage the investment and it should be held for a minimum of three years.
My Investment Property – What Can I Claim?
Don’t miss out on crucial savings – here are deductions you may be able to claim at tax time. Remember, you can only claim tax deductions on your investment property if it is genuinely available for rent, so it must either have tenants in it or at least be listed.
If you want to claim a deduction on costs incurred while making repairs to your investment property you will need to work out – did the damage exist when you bought the property or did it occur as a result of renting it out? There’s an important distinction to be made here. If the repair was for damage that existed when you purchased the property, such as repairing damaged floor boards, then these costs are not immediately deductible. Instead these costs are used to work out your profit when you sell the property. Costs relating directly to repairs for wear and tear or other damage such as a broken window or roof damage following a storm can generally be claimed in full in the same income year you incurred the expense.
Fortunately, you can claim maintenance costs in the same year you paid the costs. It includes a number of different activities such as plumbing, electrical work, cleaning, painting and gardening. The only thing you’ll have to worry about is finding a reliable person who will get the job done properly!
This is usually where property owners spend a lot of their money. Traditionally the advice would have been to make sure you get your deductions right so you can save every step of the way. While that still may be true, innovative full service flat-fee property management models means owners are spending a lot less on management fees. You can still claim deductions on agents fees so if you’re self managing, it’s worth considering a switch. You can also claim on the advertising costs of listing your property. Annual expenses such as body corporate fees, council rates, water charges and land taxes can all be claimed.
If you took out a loan to purchase a rental property, finance renovations, repairs or a new appliance then there’s good news – you can claim on interest paid. In fact, you can generally take out a loan to finance renovations and claim a deduction on the interest even if the house is vacant and not listed. When filing your tax return be mindful – if you use some of the loan money for personal use such as going on a holiday, you can only claim the part of the interest that relates to the rental property and not other expenses.
Any legal costs incurred evicting a tenant or court action for loss of rental income can be claimed.
Home improvements can be claimed but they differ from repairs. The ATO distinguishes home improvements as anything which adds value to your property, allowing you to demand higher rent. You can’t claim these costs in the same year, unfortunately. Instead, you have to claim them at a special rate of 2.5% a year on a depreciation schedule. However, if you’re thinking about installing solar panels or a more efficient hot water system, rest assured, you can generally claim a deduction on these improvements.
It’s almost tax time
Knowing all the 2019 changes that affect your tax, you can approach the end of the financial year feeling confident your Highview accountant has all the pieces in place to help you maximise your tax return. If you have further investment queries, please contact your Highview accountant today:
Cranbourne: 5990 1000
Prahran: 9529 1566
Mornington: 5911 2100
Ringwood: 8899 9797
The views, information, or opinions expressed in this article are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this article constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your Highview accountant specific to your situation.