Episode Details

If you're a property investor, today's episode is a must.

Why? Because the tax man is after you – you and all property investors.

Recently, the tax department recognized that 90% of property investors' tax returns contain an error. 9 out of 10!

They've found a number of common errors, and today Ken Raiss and I are going to tell you what they are and how to avoid them.

Remember, if you follow the letter of the law, you'll have no reason to worry even if you do get audited.

Will your rental property make you a target for the tax man?

The Australian Taxation Office might be taking a much closer look at your tax return this year than you would like.

Due to significant increases in the ATO's operating budget particularly with technology, property investors are in the ATO sights.

There are several key areas that the ATO sees as possible 'errors" made by property taxpayers and 2019 will see a doubling of taxpayers being audited.

And with the ATO estimating that over 90% of tax returns contain errors it's easy to understand their new-found enthusiasm in reviewing property investors deductions.

Some of the more common areas taxpayers must pay particular attention to include:

1. REPAIRS VS. MAINTENANCE

The tax man wants to ensure you don't get immediate tax write-offs for improvements by calling them repairs.

In short, a repair brings an asset back to the same condition it was in when you first acquired the property.

An improvement, on the other hand, is improving the asset beyond its original condition and/or changing the nature of an asset and is depreciated as opposed to written off in the year of expenditure.

The cost of repairs can be claimed in full in the year they are incurred whereas an improvement must be depreciated over its useful life.

It is not always easy to ascertain whether a cost is a repair or improvement or both, so in many situations, you should obtain tax advice.

2. INTEREST EXPENSES

The deductibility of the loan will be determined by its purpose.

So, make sure your loans are correctly structured. Keep good records i.e. you can demonstrate what investment asset each loan relates to.

Errors include incorrectly claiming interest that was not tax-deductible (i.e. debt was not used to produce taxable income e.g. a home loan) and/or the loan purpose was not able to be proven by the taxpayer e.g. they mixed purposes in one loan.

3. PROPERTY DIVESTMENTS

If you sell an investment property you will need to calculate the capital gain (or loss)

This capital gain will be taxable and if your property is owned for over 12 months you will benefit from a 50% general discount if purchased with the intention to own the property as an investment. If you purchased the property with the intention to sell it at a profit, you can't claim this CGT discount.

Capital works depreciation (the depreciation benefit you claim against your tax) needs to be added back to your profits thus increasing the profits from your sale.

4. PERSONAL EXPENSES INCLUDING HOLIDAY HOMES

The ATO's main concern is making sure that any deductions claimed with respect to holiday homes that are rented out for part of the year are correctly apportioned.

If you rent out your holiday home, carefully apportion your expenses taking into account whether the property was rented at a rate below market (to friends or family), whether it was available for rent during peak periods, if the owners unreasonably refused tenants and whether the owners genuinely took steps to find tenants during periods it wasn't occupied.

If you own a holiday house that is partly rented out and partly occupied, ensure you use the services of an experienced