Before you buy your rental property
Here are a few things to consider when buying a rental property so you can be sure that you are on the right track.
Obtain the right information
Before you start, if you are looking to buy a rental property or have already bought one, you need to have the right information. You can seek help from registered tax agents so you understand why you are required to:
- Keep records right from the beginning
- Work out what expenses you are eligible to claim as deductions
- Work out whether you must pay tax instalments throughout the year
Report any income you receive from the rental on your tax return. If you sell consider the CGT implications.
Check this information daily to make sure you’re getting the latest advice. Keep in mind that tax agents should be registered with the Tax Practitioners Board (TPB).
Understand which records you must keep
You should keep in your possession accurate records that will benefit you. Save all records from the earliest point of purchasing the property up to 5 years after the purchase of the rental property. This will include various rental records to be kept. Some records are in hard copy, and others are digital.
You can opt for Melbourne accounting solutions to keep your records digital.
Understand your expenditure before getting started
When preparing to buy a rental property, you may incur various rental expenses. Remember that you won’t be able to claim all these expenses in your tax return; borrowing expenses might be claimed as a deduction over 5 years, or the term of your loan. This includes things like:
- Loan establishments expenses
- Title search fees
- Lender’s mortgage insurance
You cannot make a claim for the following expenses:
The sum you take out to buy the property
Stamp duty payable to your territory or state government
Legal costs such as the fees of solicitors and conveyancers, which are payable on purchase of the property.
Alternatively you may be able to add these amounts to the cost base of your property. This can help you reduce the amount of Capital Gains Tax you pay when you sell your property.
When you’ve purchased the rental, but before it’s tenanted
Before you rent your property, you may want to repair existing damage.
Decisions on making repairs before your property is rented
Initial repairs are repairs that you carry out to repair damage caused to your property at the time of acquisition. For example, damaged walls or broken floorboards. These are capital expenses and you can’t claim an immediate deduction. Initial repairs are part of the property’s purchase price and cost base for CGT purposes unless they are:
- Capital works
- Depreciating assets.
After your property is rented
As your property is leased, you’ll need to regularly manage decisions on repairs, renovations, and maintenance, plus get ready for your first investor tax return. Learn what income you’re expected to report. All the income you receive for your rental property must be included in your tax return. Some types of income are:
- Rental income.
- Bond money you keep.
- Insurance payments.
Understanding maintenance, repair, or improvement
You may spend money to complete works on your rental property. For instance, fixing a broken shower, building a new fence, or replacing the carpet. And how you can claim these expenses as deductions will depend on whether the work is a maintenance, repair, or improvement to your rental property. Usually, if you:
- Replace a part of something that is damaged, worn out, or broken because of renting out the property, it’s likely to be a repair.
- Do work to prevent deterioration to keep the property in a tenantable condition; it’s likely to be maintenance.
- Replace, renovate an entire structure that’s partly damaged, or add a new structure to enhance the property; it’s an improvement.
Filing your first tax return as an investor
When you file your first tax return as an investor, you must ensure you have all your information available, including:
- All rental income you received
- Dates that the property was rented
- Evidence of all your expenses.