EPI 051 | Property Investing and Tax Time – Tips for maximising your tax refund

Things we talk about:

  • Refinancing with Mastermind Jo
  • Revising your strategy and ‘cleaning house’
  • Noel May on everything we need to know to maximise our tax refund when it comes to property investing

Quick Tip & Action


Comments

  1. Hi Kaz,

    Trying to download the latest episode. This link doesnt appear to be working.

    Thanks,

    Matt

  2. Hi Kaz, Great episode, thanks indeed. There are just a couple of additional matter’s I’d like to clarify with youself and Noel:
    1) As I currently have a portfolio of 4 properties and steady income… am I able to claim the expenses incurred from a recent weekend property trip to Gosford and Wollongong? The purpose of these trips were purely for inspecting open-house properties and to investigate the prospects of expanding my portfolio into the area (sort of like attending a seminar I suppose).
    2) The old ducted gas heater in another of my investment properties has recently given up and needs replacing (ie, not economical to repaire). I intend to replace the unit with a near-identical model. Could something like this be treated like the carpet example yourself/Noel gave in the example… hence claimed as a once-off expense (rather than depreciating capital)? Please advise.
    Regards, Paul

    • Hi Paul,
      Thanks for your questions. I will direct these questions to Noel (though he is, as we speak, galavanting around the world, so give me a couple of weeks to get back with the answers for you).
      Cheers, Kaz

    • Hi Paul

      Noel has sent through an answer to your questions:

      Hi Paul,
      I’ve finished “gallivanting” around the world and am back facing the realities of having now to pay the VISA bill.
      To answer your queries:
      1. Cost of a trip to inspect properties

      a. You cannot claim the cost of travelling expenses whilst in search of a property to purchase.

      b. Once the property has been purchased however, you can claim costs of inspecting the property, collecting rents, showing prospective tenants over the property, carrying out repairs and maintenance, gardening etc. and visiting the estate agent.

      c. Because the costs were for a pure exploratory mission, then the cost has no direct connection with the derivation of income (ie: profit making by rental) in the current year, so you can’t get a deduction against other property income.

      d. I’m sorry to say that this is a pre-acquisition cost and falls into a “capital” basket. Should you however buy property in those towns it could be argued that the cost of the investigation would add to the cost base of the property, along with the stamp duty, buyers’ agents’ fees, etc. and by increasing the cost of the asset, would act to reduce any future capital gain should you later sell the property. So don’t throw away the receipts just yet.

      e. There is some argument to say that a deduction might be available under the “black-hole” tax provisions (deductible over 5 years) which are designed to give deductions for business-related costs that aren’t deductible elsewhere. It’s a long bow to draw and there are many hoops to jump through for this to succeed (two metaphors in one sentence, not bad). I would want to see the precise details before I comment further.

      f. ps – Are any of your other 4 properties in Gosford and Wollongong? If so, surely would have been doing a property inspection to ensure that the tenant was looking after the place, which would be tax deductible.

      2. Repairs

      a. Tax commentary goes on for pages and pages on the fine line between a repair and a replacement.

      b. In deciding whether the work carried out is a repair or not, you are allowed to replace an old model with a new model provided the replacement doesn’t result in an improvement over what you had. The test to determine deductibility is whether there has been a “restoration of a thing’s efficiency of function (without changing its character) rather than an exact repetition of form or material”. Wow, what does that mean? If the gas heater had parts replaced, it’s a repair. If it was not economical to replace the parts but a functionally similar heater was purchased, and the old one discarded, then I would punt for a “repair”. If a better heater was purchased which did more things (an improvement) then it will be treated as a depreciable asset and the cost must be written off annually over its economic life. Mind you, the old heater could then be scrapped and an immediate tax deduction claimed for the value of the asset that was being carried for in the books.

      c. From what you have described, I would treat the planned expenditure as a repair on the basis that something has (or is about to) fail and you are simply restoring the functionality and not improving the situation.

      Hope this helps

      Noel

      • Hi Noel,

        Welcome back and I trust you enjoyed yourself. I also recently returned from an extended trip where if I learnt one thing is that podcasts are a great form of company in long bus trip when the road’s either too rough or when the bus is too dark to be reading.

        Thanks very much for your reply. It was much appreciated. I fully understand your response regarding my property trips and will therefore delete from my logbook my weekend trips to Gosford and Wollongong. I do however have properties in Sydney and will keep those trips in my book.

        Based on your comments regarding repair vs improvements, it would appear that my heater replacement qualfies as a repair for the following reasons… the old unit was impossible to repair, the new unit was another base model and was installed into the existing ducting, vents, mounting frame, electricals, gas plumbing, exhaust pipe and control unit…. much like replacing the worn carpet in the example you provided.

        Thanks again for answering my questions and in such detail. Please also pass on my regards to Kaz (and Den).

        Paul

        PS: As for good bookkeeping for investors, I would recommend to everyone using MYOB (or something simpler if double entry is not your thing) and to stick all small receipts on A4 sheets and filed in chronological order. I’ve been maintaining the books this way now for over a year and admit that it’s a great feeling to be organised. Using an accounting system also allows easy access to info and hence makes me a more effective investor. I especially like your comment “making the transition from a hobbie to a business”.

        • Hi Paul,
          A couple of quick answers.
          All legal arrangements should be perused by a lawyer, just to protect your interests. That said there are ample templates available for a limited recourse loan to a super fund. I have some which would need to be tailored to your circumstances. While they are accurate and are used regularly for such situations, it would be wrong of me to suggest that you need not refer legal matters to a lawyer.

          On the question of the sale of property already owned by you to your superfund. There are restrictions on a super fund acquiring assets from members or associates, not the least of which is that residential land cannot be sold across. There are some exceptions; Commercial property used exclusively for the running of your business (not just commercial property that is rented out), listed securities and an in-house asset which is an asset which is acquired from a member but which is less than 5% of the market value of the fund’s assets.

          So you can sell across your shares at market value to the fund. Be careful of the capital gain that you may trigger.

          Please feel free to ring me if you want to discuss this further.

          Regards
          Noel May

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