At tax time, property investors can miss out on valuable tax breaks if they don’t have an updated depreciation schedule and a shrewd tax accountant. Depreciation schedules itemise the assets in your property that lose value over time (such as ovens, carpets and even the building). These losses can be written off against your taxable income, reducing your tax liability. Whilst repairs are 100% claimable as a tax deduction in the year they occur, renovations are written off over several years.
Renovating is one strategy to increase property value and rental returns, but for tax-deduction purposes, the boundaries between repair and capital improvement can be fuzzy. Many people may be unaware that if, for example, you replace a kitchen you may be able to also claim any residual depreciation balance on the kitchen that was removed. Updating your depreciation schedule should form part of any renovation.
Finally, we’ve all heard of bracket creep when it comes to income tax, but investors should also be wary of bracket creep with regards to land tax. As property values rise, they can surpass the tax-free threshold, which might vary from state to state. Reporting criteria also differ from state to state, so again, it pays to consult a decent tax accountant to advise you on land tax position and help ensure your portfolio maintains maximum tax-efficiency.
Until next week,