Residential Investment Property – Tax Obligations!

Keeping You In The Know – Experts Advice

The Australian Taxation Office (ATO) has over the last couple of years been contacting rental property investors to set them on the straight and narrow regarding their tax obligations. Recently, the ATO sent letters directly to taxpayers who reported for the first time in their 2010/11 Income Tax Return, that they had an investment property. This letter was to assist their understanding of their tax obligations and how to avoid common mistakes in reporting on their investment.

Investment property is a passive investment, which means that any losses resulting can be offset against other income such as salary and wage income. Apparently this has been embraced by investment property owners to the point where losses have been overstated due particularly to incorrectly applying the whole of the interest component of the mortgage repayments when the borrowed funds were not used solely for the purchase of the property, ie. renovations on the principal place of residence or other personal expenditure.

Taxpayers are required to accurately record the proportion of expenses actually attributed to the investment property, as the ATO has many avenues of data matching and benchmarking that may result in a previous year’s tax assessment being amended, and usually not in the taxpayers favour.

There is also evidence from the ATO that many deductible expenses are not being claimed by property investors. Landlords can claim deductions for a range of expenses such as advertising, bank charges, body corporate fees, cleaning, council rates, electricity and gas, gardening, insurance, loan interest, land tax, lease preparation expenses, legal costs, pest control, postage and stationery, property agent fees and commissions, repairs, secretarial and bookkeeping fees, telephone charges and water rates. You may also be able to write off the cost of certain buildings, depreciating assets and borrowing costs over time.

Landlords also need to understand how to account for initial repairs, capital improvements and ownership interests.

It is your responsibility to seek professional advice and/or research the tax issues of owning investment property, so that you don’t get a nasty surprise from the ATO.

More information regarding the tax issues of rental property investments can be found on the ATO site: http://www.ato.gov.au/content/00131327.htm

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