As most first-time buyers can agree, property tax and tax claims can be overwhelming. You’re already making one of the most important decisions in your life, and then, on top of that, you need to avoid falling for property tax traps and understand what you can claim, deduction-wise.
“Property tax traps are those tricky areas where property owners can get caught off-guard, resulting in unforeseen financial burdens,” says Simon Cohen, founder and director of Australia’s largest residential property buyer’s agency, Cohen Handler, and property ambassador for H&R Block. “Buyers are often rocked by just how much there is to know about property investment before taking the plunge.”
Once you own an investment property, it can be quite inexpensive to keep it. You’re earning rent and getting a tax deduction on many of the expenses associated with owning. Still, you do need to understand the tax consequences of owning an investment property, as well as all the deductions you can claim.
“I think a lot of people are naïve or unaware of the best way in which taxes can be reduced or cut down — and when you take those sums into consideration, it can be the difference between a good and bad yielding investment,” says Cohen.
Ahead, Cohen shares a few mistakes to avoid with investment properties.
Claiming Deductions For Vacant Investment Properties
Cohen says he sees many people claiming deductions for investment properties that aren’t genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent.
“Also, periods of personal use can’t be claimed,” he says. “This is particularly important for holiday homes, where the ATO regularly finds evidence of homeowners claiming deductions for their holiday pad on the grounds that it is being rented out, when, in reality, the only people using it are the owners, their family, and friends, often rent-free.”
Recently, the ATO issued a list of four questions holiday homeowners should be asking themselves; consider your answers to these to determine if you have anything to be concerned about.
Claiming Excessive Interest Expenses
Another money mistake with investment properties Cohen sees often? Claiming excessive interest expenses, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
Incorrectly apportioning rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
Not Being Aware of Stamp Duty
As for what property taxes you should be aware of, stamp duty is an important one to know, says Cohen. If you’re not familiar with stamp duty, it’s tax imposed on legal documents, particularly those related to property transactions, contracts, and agreements.
“It’s paid to the government to validate and record these documents. Stamp duty can significantly impact the upfront costs of purchasing a property,” says Cohen.
Not Being Aware of Capital Gains Tax
Capital gains tax is another property tax to know about. It’s the profit earned from selling stocks, real estate, or investments.
“It’s based on the difference between the selling price and the asset’s original purchase price,” says Cohen. “When selling a property, capital gains tax can become a concern and may affect overall profits.”
Not Being Aware of Land Tax
Final important property tax to be aware of? Land tax. It’s a recurring tax levied by governments on the value of owned land.
“It’s typically assessed annually and is based on the land’s estimated or market value,” says Cohen. “Landowners must pay this tax to the government to contribute to public finances. It can be a trick, as land tax can vary depending on the type and number of investment properties they own.”