Why investors miss out on tax deductions

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Thousands of Aussies are at risk of missing out on lucrative tax deductions, with more and more owners opting to live in their investment property before renting it out, according to BMT Tax Depreciation.

Data relating to the 2018-2019 financial year to date showed that over one in four people had lived in their property before renting it out, representing a rise of nearly 2.3% over the previous financial year.

Given the modifications to tax depreciation laws, many of these people could lose thousands of dollars in tax deductions at a time when the property market is weakening,

“Owners of income-producing investment properties can claim lucrative tax deductions for ‘plant and equipment’ items in a property such as carpet or air conditioning units. However, under the new laws, if an investor is living in a property at the time the assets are installed, the items will be considered previously used and cannot be claimed,” said Bradley Beer, chief executive officer of BMT. “Our data suggest that a growing number of people are opting to live in a property while renovating and before renting it out. If they choose to make these types of additions to their property during this time, they could lose out on thousands of dollars of tax deductions.”

Beer advised investors who want to install new plant and equipment assets to execute their plans after they move out of the property and list it for rent. This simple approach could increase their depreciation deductions and improve the cash flow generated by the investment property each year, according to him.

Capital works deductions for structural items, meanwhile, such as new walls, kitchen cupboards, toilets and, roof tiles are unaffected by the legislation changes and can be claimed by owners of income-producing investment properties.

The tax depreciation company also reported that during the 2017-2018 financial year, 30.9% of requests for BMT depreciation schedules were for brand new properties. The figure is up from 26.4% of all depreciation schedule requests received during the 2015-2016 financial year.

“The new legislation does not affect buyers of new properties, so these properties typically hold the most lucrative value for investors from a tax perspective,” said Beer.

Beer said that this exemption and the new stock that has entered the market in recent years might be a factor in the increased demand for new investment properties over second-hand properties.

While there were changes in the rules, BMT reminded investors that there are still lucrative tax deductions on offer for most investment properties.

“We found an average of $8,212 in deductions in the 2017-2018 financial year for all residential investment properties,” said Beer.

 

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