Are you getting the tax benefit?
June is traditionally financial reconciliation time where investors need to get their property affairs in order, sort out the paperwork, talk to their accountant and submit their tax return. Property investors are in business and can write off their costs against the income before paying tax. For me it’s all about getting as much tax return as possible so that my portfolio ends up cashflow positive. Read on about the X-factor you need to have a significant effect on your bottom line at tax time.
DIY Taxes or use an Accountant?
As an investor with multiple properties, I would not consider doing any of my own tax returns. I have a wonderful accountant who has the qualifications and experience to know how to maximise the tax claims for me. She understands the difference between capital works, depreciating assets and claimable holding costs. In other words she knows the Tax Law and I rely on her to claim everything I am entitled to. A good accountant is like having a coach who will get you the results while you can get on with the fun part of playing your best round of portfolio building.
As an investor, what should I prepare for tax time?
Some of us are born with the organisational gene and some of us are not! If this is not your strong point and you have a boxful of mixed paperwork at the end of the year, then be prepared to pay your accountant more money for them to do the paperwork, as well as the tax return. A simple way to save money is to keep the paperwork organised.
Buy a ring binder folder for each property with separate tabs for each category that you need to file for your accountant. My folder has a tab for rental statements/ bank statements/ repairs & maintenance/council rates/insurances/tax variation/depreciation reports/strata or body corp fees.
For those who like everything electronic simply transferring the property information above into an Income and Expense Excel spreadsheet is very effective and your accountant will love you more and charge you less. I find that keeping this spreadsheet up-to-date monthly is a better idea than waiting until the end of June to transfer 12 months’worth of information. Please email me if you would like a copy of this spreadsheet.
Depreciation Reports and the X-factor
One thing I do not leave to my accountant is to estimate the depreciation claims on my properties. Whilst accountants are great at estimating the depreciation claims for business equipment such as computers & cars, estimating depreciation on a property requires a building expert called a Quantity Surveyor. A Tax Depreciation Schedulewill maximise your depreciation claims and get you a bigger refund. Investors can potentially lose thousands of dollars in claimable building, plant and equipment write-offs without a depreciation schedule. As my strategy has always been to buy new properties, the depreciation claims are very high and can result in significantly higher tax refunds from the taxman. This is the X-factor I am looking for!
Building depreciation lasts on new properties for 40 years and for the first 10 years, the inclusion of plant & equipment write-offs makes the claimable amount very significant. On a new property, I bought for $369,000, the claimable depreciation loss was $12,000 in Year 1 which gave me approximately $4000 more in my tax return. The power of depreciation claims to your bottom line as an investor should not be underestimated.
As investors, we all want to minimise our holding costs with our properties and maximise our tax deductions. So instead of worrying at tax time, be organised and prepare for tax time with a system that will make it easy and cost effective for you and easy for your accountant.
We all want that extra something that will give us a significant better outcome at tax time. We all want that x-factor. The type of property you buy, the age of the property and the amount of depreciation can have a big effect on how positive or negative your cashflow ends up after your tax refund. For me, the more positive cashflow outcome after tax refund allowed me to grow my portfolio faster with less stress and worry. No wonder I quite like the taxman - he's the X-factor!
This has been adapted from an article Lindy wrote which first appeared in Your Investment Property magazine on the 10th June, 2016.