There has been a lot of press recently with regards to the current property prices, particularly in Sydney, but if you do your research and plan accordingly, there are opportunities available for those wishing to get into the property market.
Here are some tax tips on things you should consider: –
Plan accordingly before you buy
When making the decision to acquire a property, whether it is as a family home or an investment, decisions about the ownership structure need to be thought out carefully. The following structures available are:
• Partnership – jointly or tenants in common
• Company – not good for assets which appreciate in value
• Trusts – Unit, Discretionary, Hybrid, Testamentary or Super Fund
By planning according and doing your research you’re preventing missing vital information before making a big investment. Before making a decision on what structure you would like to proceed with the following should be taken into consideration.
• Asset Protection – This is important for people running business, employees are generally exposed to less risk and where property is generally held for a long time.
• Income tax planning flexibility – Consider structuring ownership so income is derived by family members with lower marginal income tax rates and any negative gearing losses are derived by family members with higher marginal tax rate. Also consider the likely capital gains tax (CGT) implications on the eventual sale of the property.
• State Taxes – Some structures, such as discretionary trusts, are not eligible for land tax thresholds available to other structures, increasing ongoing ownership costs associated with the property.
• Retirement planning – flexibility in owning assets and/or generating income to maintain lifestyle while potentially accessing government benefits.
• Succession planning – how the ownership of the property impacts your estate and how you want to pass the asset on to your family members. Depending on the structure you choose, there may be CGT, stamp duties and other transfer expenses.
Management Considerations after you buy
A majority of property is usually owned over a long period time due to the high transaction costs associated with its purchase and sale e.g. stamp duty, agents fees and legal costs.
It is important that your maintain all of your documentation in a safe and accessible place. This documentation will be required to calculate the CGT on the sale of the property and a summary of the cost base and borrowing expenses are recommended. Some documents that should to be included are Solicitors settlement letter, Solicitors legal fees, Pest and Property Inspection report, Lender’s letter of approval and terms of the loan, Conveyance Stamp Duty receipt – just to name a few. If in doubt, keep a copy, or ask us if the documentation is relevant.
If the property is purchased as an investment, you also need to maintain records for your yearly income tax returns, including:
• Rent received – If managed by an agent they will generally give you a summary. However, if you manage the property directly, you will need to keep a record of this income.
• Management (agent) costs (if applicable)
• Ownership costs – such as council rates, water rates and strata levies
• Depreciation of plant or capital write-off of building cost – To be eligible to claim these expenses you will need to obtain a quantity surveyors report for the property.
• Landlords Insurance
• Private usage
Even if you do not rent the property out (for example, if you own a holiday house or use it as a main residence), it is important that you maintain records of all these costs – Any costs associated with the property that are not claimed as a tax deduction can be added to the cost base for the property for CGT purposes.
And remember, an investment should never be made just for tax reasons. You need to ensure that the investment is suitable for your circumstances.
If you would like any more information or advice on how to structure a property investment, please contact Grange Business Partners – we’re here to help!