National accounting firm, Chan & Naylor compiled this impressive list of Australian Tax Office approved strategies for property investors to reduce their tax*:
1. Claim interest expenses on any borrowing used to purchase investments. The purpose of the loan determines deductability, not what asset was used by the bank as security.
2. The proper use of trusts can legally allow negative gearing at marginal tax rates while allowing the benefits of estate planning and asset protection.
3. Do not underestimate the depreciation on the building, fixtures and fittings. Even old properties can have a reasonable deduction when advised by a specialist quantity surveyor.
4. Before renovating, have a quantity surveyor prepare a demolition schedule to place a value on all items being scrapped for an immediate tax deduction. On completion, a new depreciation schedule will be needed.
5. All costs of a holiday or personal use property (other than the main residence) can be added to the original cost when calculating capital gains in the event of a sale. This includes interest expenses, repairs and maintenance.
6. When selling an investment property include all associated costs: conveyancing, stamp duty, selling agent’s fees, buyers agent’s fees, marketing costs including minor touch ups and rental furniture, and the balance of borrowing costs.
7. When refinancing, expense the balance of the original borrowing costs or exit fees.
8. Land tax costs are deductible.
9. Interest expense on borrowings to purchase land is also deductible, if the intention is to build an investment property on the land, even if construction has not yet commenced.
10. Always consider the timing of a sale, and keep in mind that tax is triggered at date of contract, not settlement.
11. If an investment property is sold after 12 months then a 50% capital gains discount applies if the property was originally purchased with the intention to keep long term. If you have sold a property related to your business you may be eligible for the 50% small businesses exemption on top of the 50% CGT general discount.
12. If an investment property is sold BEFORE 12 months, then the gains are still a capital gains (with NO 50% discount) which can be used to offset any capital losses.
*Tips sourced from Property Observer column 27/7/2012 by Ken Raiss of Chan & Naylor.