Rental Property Tax Mistakes To Avoid
There are several tax advantages available when you invest in property. Through negative gearing, there may be considerable amount of tax that can be saved on your personal income.
Rental property tax mistakes causes some anxiety for rental property investors who make claims for deductions that they are not entitled to and getting themselves into trouble with the tax office.
What sorts of mistakes are they looking for?
According to Deloitte, common mistakes revolve around when you can and can’t claim interest payments.
Deloitte says deductibility is determined by use of the borrowed money rather than the security provided. Interest on funds borrowed for private purposes is not deductible, no matter what is used as security. For example, let’s say Mike owns his home outright. He decides to rent it out and borrows to buy a new one using his old home as security.
Deloitte says the money borrowed to buy the new home is for private purposes and therefore the interest is not deductible, despite the fact the property used as security is now rented out.
Linked and split loans can also create tax problems. These loans provide finance for both private and investment purposes. Deloitte says they are often marketed on the basis that people can pay off their home loans faster and get bigger tax deductions for interest by paying off their private loan first and letting the interest accumulate on the investment loan. But this might not be the case.
Deloitte says there are two tax rulings on the deductibility of interest on such loans and a more recent tax determination discussed how the anti-avoidance provisions of tax legislation could apply to arrangements that make the payment of interest on the capital sum paid in reduction of the home loan tax-deductible.
Where a loan is used for both investment and private purposes, Deloitte says the interest needs to be apportioned. For example, interest paid on money initially borrowed to buy a rental property but used in part to buy a car or pay off a credit card will not be fully deductible. Only the interest relating to the money borrowed for the investment property will be deductible.
Where a rental property is held in joint names, it says, the interest must be split according to the legal ownership of the property. And where a property is rented to a family or friends at less than a commercial rent, the interest may be calculated on a pro rata basis.
In determining the tax deductions available from rental property investments, is not as simple as it may seem. When it comes to tax time using a tax agent will ensure that you receive a full return that you’re entitled to.