Accounting for Investment Properties

I often get questions about what can be claimed, depreciation, and the intricacies of property investment. While I understand a lot of it, I’m not authorised to give financial advice. That’s why I invited Tony to provide some expert insights.

When considering buying an investment property, it’s crucial to seek advice before making any commitments. Consulting with accountants, financial planners, and possibly lawyers can help you understand the investment decision. This step is vital because buying an investment property is a significant financial decision, often second only to purchasing your own home.

Once you’ve found the ideal property, the next step is to seek advice again. It’s important to decide who should buy the property for optimal tax benefits and future investment considerations. For instance, if one partner earns significantly more than the other, it might be advantageous for them to be the owner to maximise tax breaks through negative gearing. Additionally, consider the future implications, such as capital gains tax when selling the property.

Sometimes, using a discretionary trust can provide better outcomes. An accountant, in coordination with a lawyer, typically sets up this trust. This involves registering with the ATO for tax file numbers and possibly an ABN.

If you’re thinking about purchasing property through a self-managed super fund (SMSF), you need to ensure that the trust is established before signing the contract. This setup can be complex due to additional ATO rules, especially if the super fund needs to borrow money, known as a limited recourse borrowing arrangement (LRBA). Under LRBA, you cannot make capital improvements to the property while the loan exists. However, ongoing repairs and maintenance, like replacing stoves or carpets, are permitted.

Capital improvements versus repairs and maintenance is a crucial distinction. Improvements like extensions or new kitchens are capital costs and are not immediately tax-deductible. In contrast, maintenance tasks like painting or replacing broken items are deductible expenses.

A tax depreciation schedule is essential for any property owner. It provides immediate tax deductions and aids in future capital gains calculations. This schedule outlines deductions on the building and specific items like air conditioners and stoves. Keep detailed records of any improvements or maintenance to update the depreciation schedule and ensure accurate tax returns.

An end-of-financial-year statement is also vital. It summarises all income and expenses, helping both you and your accountant prepare accurate tax returns. If you need to make an insurance claim for tenant-related damages, those costs are typically deductible, and any insurance recovery is considered income.

For properties that need repairs to meet minimum housing standards, the ATO generally treats major repairs within the first 12 months as capital improvements, not immediate deductions. Keeping detailed records of these expenses ensures they can be added to your property’s cost base for future capital gains tax calculations.

Lastly, travel expenses to inspect your property are generally not deductible, especially if it involves out-of-state travel.

This session has been invaluable, even for me, and I hope you found it helpful too. If you have more questions, please leave them in the comments. Tony and I plan to cover more topics, such as capital gains tax and other investment strategies, in future episodes.


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