Thursday, 17 June 2010

Busting property investing myths

Busting property investing myths

Max Newnham
June 9, 2010 - 4:27PM

Australia's love affair with property is well-known. When it comes to investing, a negatively geared property has long been a preferred investment. Many people find it hard to go past the security bricks and mortar offer.

Unfortunately there are many myths about the tax advantages of property investing. When an investor does not understand the taxation rules, and they are audited, the resulting tax penalties can eat up any investment benefits.

One of the first tax myths of property investment relates to claiming travel costs. This is especially the case for interstate property ownership. There is a general misconception that all costs associated with visiting a rental property are tax-deductible. This includes airfares, accommodation and incidentals. Nothing could be further from the truth.

The proportion of travel expenses that can be claimed is determined by how much time is spent travelling related to the rental property. If you had a Queensland rental property and flew up there, stayed a week, and spent an hour inspecting the property, very little of the travel costs would be tax-deductible.

On the other hand if you spent a week arranging repairs, carrying out some repairs yourself, visiting the agent, buying furniture, and generally spent nearly all of your time on property matters, the whole of the travel costs would be tax-deductible.

Motor vehicle travel costs can also be deductible for local properties. Again, if the travel involves driving past the property it would be hard to justify a claim. Whereas if the trip relates to inspecting the property when a tenant leaves, doing the mowing or carrying out repairs, a claim could be made for the travel on a kilometre basis.

Another tax myth of property investing is the tax-deductibility of interest on loans. The property used as security for a loan does not dictate whether the interest is tax-deductible. Rather, it is the purpose for which the funds have been borrowed that determines tax-deductibility of interest. If the purpose of a loan is to purchase a home, rather than an investment property, the interest on the loan will not be tax-deductible.

A situation where this occurs is when a decision is made to purchase a new home but keep the old home as a rental property. Often the loan to purchase the original home has been almost repaid and there is a lot of equity in the property. Where a new loan is taken out using that equity, and the funds are used to purchase the new home, the interest is not tax-deductible.

From a tax point of view it makes a lot more sense to sell the original home, make a tax free capital gain on the sale, use the funds to purchase the new home, making this loan as small as possible, then find a new property to purchase as an investment.

The final tax myth of property investing is that all amounts spent on repairing a property are tax-deductible. A tax deduction can only be claimed on repairs to a rental property – not improvements. Improvements are any work that makes an asset better than the condition it was in when purchased.

It is for this reason repairs carried out after purchasing a property, to get it into a condition where it can be rented, are not tax-deductible. Where a property has been rented for some time, and work is carried out such as painting to repair damage while it was rented, the cost will be tax-deductible.

Investment tax questions can be emailed to max@taxbiz.com.au

This story was found at: http://www.smh.com.au/money/on-the-money/busting-property-investing-myths-20100609-xw3y.html

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