Investment Property F.A.Q.
Whose name should I buy an investment property in?
This is one of the most common questions we receive. We have an excellent page within our website dedicated to this topic – Ownership – follow the link to get all the information. If you have any further questions please contact the team at GGA.
Does a Property Depreciation Schedule have an expiry date?
Depreciation schedules don’t expire as such, but generally they only run for 10, maybe 20 years. We cannot speak for other accounting firms, however here at GGA, we enter all the depreciable items into your tax returns right from the start which means that they just continue to roll over in your tax return indefinitely. This is very helpful if you replace an asset listed on the schedule or if your purchase additional assets.
If two friends/family members are going to start to buy investment properties together, what kind of structure/contract should they have in place prior to purchasing their first property?
There are a number of factors that you would need to consider before going ahead and purchasing a property with a friend – the main one being how much do you trust them?! Next you need to ensure that you purchase the property as tenants-in-common and not joint tenants – this will protect your share in the investment should you die. Of course, there are other factors to consider such as whether or not a trust would be beneficial, what you intend to do with the property, and how many you think you will buy together, which all influences the structures and strategies you should use. Just remember to do your research and speak to us prior to signing any contracts.
If I am thinking of putting my investment property on the market, is there anything I should be aware of? Particularly in the lead up to the end of the financial year?
The main thing we find clients don’t realise is that capital gains are calculated from contract date to contract date (NOT settlement date), so if the contract is signed on 29 June 2012, the capital gain falls in the 2012 financial year, even if the property doesn’t settle until September 2012, or the 2013 financial year. Another point to note is that the capital gain is the difference between the purchase price and costs and the sale price – the amount you owe on your loan does not come into the tax calculations at all.
We purchased our home in 2002. This year we decided to build two units at the front of our home and strata title the land. Our plan is to buy again and not have a mortgage in three to five years. What should we consider to avoid GST and capital gains tax (CGT) liabilities on this project? What applies if we sell one or both units? If we sell our main home and consider living in one of the units for 12 months as our residence, is this beneficial and how does GST and CGT affect us? Should we just sell all to buy our new property?
There are a lot of variables here, but in general GST applies to any new residence sold for the first five years. So to avoid paying it you would need to hold and rent, or live in the unit for five years. You could potentially reduce the amount of GST by using the margin scheme, if it’s available. CGT, or income tax on sale(s), is a bit trickier and one or the other would apply to the sale(s). If you were to move into one of the units when it’s completed and you have no other primary residence, you could potentially claim the main residence exemption and pay not CGT if you sold after 12 months of building. If you have obtained a market valuation prior to demolishing the house and building the units, this can help the CGT or income tax you would have to pay. You will need to speak to your accountant or tax advisor with the details to get more specific on the amounts of tax you can expect to pay.
I’m planning to buy an investment property for which I plan to take a loan from my parents to provide the 10 to 15 per cent of the deposit with the remaining loan from the bank. My parents will give me a loan but want to charge an interest on it. Can this interest payment to my parents be claimed as an expense against the rent, similar to the interest payment to the bank? If yes, what would the Australian Taxation Office require as a proof – for example, payment confirmation in writing from my parents, agreements? What are the implications if my parents agree to charge me a rate lower than market rate?
Yes it is possible to claim the interest paid to your parents as a tax deduction as long as there is a formal loan agreement in place. If you were to be audited the ATO would likely need to see this agreement as well as a paper trail showing the interest as actually being paid, ie. bank statements or similar. The rate they charge you will have no effect on this. Your parents need to also remember that they will need to declare the interest income they receive as income in their tax returns.
My question is, we purchased a rental property and borrowed the full 100 per cent plus set-up fees and charges, as well as some money for a managed fund. Come tax return time which part of the borrowings are we able to claim against? The property is negatively geared.
Any interest paid on loan monies accessed for the Rental Property, Rental Property Costs and a Managed Fund will be 100% deductible. These loan monies are for investment purposes not private purposes therefore fully deductible.
I have an investment property loan for $270,000 that’s interest only, and repayments come out of my transaction account, which is an offset account. The rent also goes in this offset account. My own home loan for $350,000 is also linked to this offset account. Because the rental income is much less than the interest paid on my investment loan, my offset account is being used to reduce my own home loan. At the end of the financial year, I give my accountant statements from the rental property agent as well the interest bill for the investment loan from the bank to work out my tax return. Any other expenses related to the property, i.e. insurance premiums and council rates are also given to the accountant. Please tell me if I am doing anything incorrectly?
The ATO have issues with rental income being used to reduce your home loan while the Investment Loan remains at the same balance. The ATO see this as tax avoidance. However, in this case, your rental income is less than your interest you are actually using your wages & other funds in the offset account to prop up the investment loan so there are no problems. If the rental income was more than the investment loan interest the ATO may have an issue with the arrangement. For your own record keeping purposes it may be easier to keep private expenses separated from your investment related income and expenses. To do this it would be advisable to talk to your Mortgage Broker or Banker.
What are the implications of renting out a room in my principal place of residence and what percentage of expenses become deductible doing this (loan interest, gas, electricity, council rates, etc.)?
If there are two adults living in this house, you and your Partner for example, and you rent a room to a third person and this person is free to use all the other rooms and facilities of the house then it would be estimated that all expenses that you have mentioned would be able to be claimed 33.33% against the rent that you are receiving off the tenant. Please be aware that for the period of time that you have that person renting 33.33% of that time will be subject to Capital Gains Tax when you sell the property in the future.