Cashflow can become a major problem with yourproperty investment. For beginners, slow cashflow could prevent you from building your portfolio as quickly as you’d like. Happily, there are some tricks you can use to make improvements to your investment property cashflow.
So, you’ve got what you think is a great investment property. You’ve followed all theproperty investment basics, but your cashflow is tighter than you expected. At times, it can be a real struggle to pull together the money to pay for the property’s expenses.
This is a common problem, no matter how well you’ve followedinvestment property tips. Beginners, in particular, tend to struggle with getting their cashflow up to the level they’d hoped for.
All is not lost. There are a few tips you can follow to improve your investment property cashflow.
Tip #1 – Raise the Rent
It may seem like a simple tip, but it’s one that many beginners don’t think about when they’re dealing with cashflow issues. Raising the rent on your property can offer a short-term solution while you look at the bigger problems.
Of course, you can’t do this every time you face a cashflow issue. Constant rent increases will drive your tenants away. However, it becomes an option if you haven’t re-examined your rents for some time. In such cases, you may be charging less than other investors in the area.
You must also remember your tenancy agreement, along with the laws of your state. Either may prevent you from raising your rents. That’s why many investors wait until the end of a tenant’s lease period before increasing the rent. With some luck, you can secure the tenant on a longer fixed lease at the new rate.
Tip #2 – Take a Look at Your Home Loan
Do you still have the same home loan you applied for when you bought yourinvestment property? Australia has dozens of lenders who offer hundreds of mortgage products between them. Take advantage of that fact to secure a better home loan.
Work with a mortgage broker to find out what other products are out there. You may find that switching your loan gives you access to lower interest rates and some useful new features.
Alternatively, you could use the information you find as leverage against your current lender. Most lenders want to keep reliable clients. If you’ve made on-time repayments, you may find that your existing lender offers a better deal when you threaten to leave.
Those are some long-term options. You could also switch your home loan to interest-only periods for a short while. This will help you to deal with more immediate cashflow concerns.
Tip #3 – Look at Other Income Streams
Theproperty investment basics don’t always cover the other income streams your property may have to offer.
Take some time to think about how you could use your property to generate more than the rental income.
For example, you could lease the side of the building as advertising space if your property is near a busy road. Alternatively, you could lease out any unused parking spaces. Each offers a little extra income beyond your property’s rental income. Remember, that every little bit can help when you have cashflow problems.
Tip #4 – Examine Your Outgoings
Reducing costs is a crucial part ofproperty investment. For beginners, this means taking a detailed look at your figures. You may find that you’re paying too much for your insurance. Or, you could negotiate a better deal with your property managers.
Many who encounter cashflow issues find that they’re paying too much for various services. You may also be paying for things you don’t need. For example, you could handle some basic maintenance issues yourself, rather than hiring somebody to do it for you.
Again, this frees up small amounts of cash. Nevertheless, you’ll improve your cashflow with each positive change to your outgoings.
Tip #5 – Get on Top of Depreciation
It’s amazing to think about how many new investors don’t think aboutrental property depreciation rates. They don’t investigate the claims they could make on their assets. Instead, they keep plugging away without a depreciation report. Alternatively, they assume their accountants have factored depreciation into their tax returns.
You need a depreciation schedule. If you don’t have one, you’re cheating yourself out of thousands of dollars.
Hire a quality Quantity Surveyor to draft a full depreciation schedule. Your surveyor will ensure you claim the maximum amount over the lifetime of each asset. Furthermore, you’ll learn more about tax compliance in your state.
Your Next Step
You’ll make both short and long-term improvements to your cashflow if you follow these tips. You can handle the first four with the help of an accountant and mortgage broker. However, you need additional help to create a depreciation schedule.
Washington Brown has the answer. Speak to one of our Quantity Surveyors today to get a quote.
An investment property tax deductions calculator won’t always show you everything you can claim. Many leave out the assets that go into a typical depreciation schedule. Here are the things that your tax depreciation schedule must contain.
When it comes to tax, there’s one question you must ask about your investment property: what can I claim?
There are the basics of course. Everybody looks into mortgage tax deduction. Australia is full of financial experts who can help with this issue. You may even find that an investment property tax deductions calculator can do the basics for you.
But what about property depreciation? It’s a type of deduction many investors miss, but it could save you thousands of dollars every year. Others make claims, but do so using the wrong schedule. Again, they end up missing out on thousands of dollars in savings.
You need to call in the experts. No, that doesn’t mean your accountant. Instead, a Quantity Surveyor is the professional you need to create a strong depreciation schedule.
The typical schedule will include the depreciation of capital works and equipment. However, some leave out other, less obvious, assets. Here’s what your depreciation schedule must contain if you’re to maximise your deductions.
You may have chosen a unit or apartment as your first investment property. Australia has several cities, which can make such properties a wise investment choice.
Naturally, you’ll claim depreciation on your unit’s assets. But what about the assets that it shares with other units in the apartment complex? You can claim for your portion of those too, but many investors miss out on these deductions.
Common items include fire extinguishers, air conditioning units, and lifts. You can also claim for ventilation and hot water systems. You don’t get to claim depreciation on the full value of the asset, but even a little bit can help with your cashflow.
Item #2 – Scrapped Items
Let’s assume you’ve carried out some renovations on your property. Oftentimes, you’ll have a bunch of assets left over that you no longer have a use for. Many just throw such items away, without giving them a second thought.
That’s a mistake. Old items have what’s known as a scrapping, or residual, value. This is the item’s value once it’s reached the end of its use.
You can claim a final depreciation sum on any items you intend to throw away following renovations. Such items include old appliances or carpets. Have a Quantity Surveyor create a new depreciation schedule prior to your renovations. This will ensure you catch any assets with scrapping value.
Item #3 – Common Outdoor Items
Let’s come back to shared items. It’s not just the common indoor items you can claim depreciation on. Any common items outside the apartment block itself have value to you as well.
This includes pathways, fences, and various landscaping items, such as pergolas. You may even be able to make claims on a shared swimming pool.
However, you can’t claim for all common outdoor items. For example, turf and plants won’t find their way into your depreciation schedule.
Item #4 – The Fees You Pay to Design Professionals
Did you realise that you can include the fees you pay to design and construction professionals in your tax deductions? Australia offers plenty of opportunities to build your own property. Investors often go down this route, rather than buying an existing property.
Your depreciation schedule must account for the costs of such construction work. This includes the money you paid to any designers or architects who worked on the project.
Make sure you supply your Quantity Surveyor with accurate receipts for these services. This will allow you to maximise your claim for the fees you pay.
Item #5 –Money You Pay to the Council
You may have to pay fees to the council for various services. For example, there are costs involved with lodging application fees, or getting council permits.
If you’re building your own property, you may also have to spend money on infrastructure. This might include gutters and footpaths.
Your depreciation report should include all these items. Again, this is something that many investors miss out on because they don’t think the costs relate directly to their properties.
The Final Word
Check your depreciation report again. Does it include all the items on this list? If not, you’re missing out on several Australian Taxation Officer (ATO) tax incentives for homeowners.
You need the help of Washington Brown to create an accurate tax depreciation schedule. Call us today to speak to one of our Quantity Surveyors about your property.
Six Things To Know Before Buying an Investment Property:
You may be thinking about buying an investment property. Australia has a strong property market, which attracts a lot of buyers. However, there are some property investment basics to keep in mind.
The attractive Australian house market has many people investing in property. For beginners, this means learning the property investment basics that will lead them to success. After all, property isn’t a sure thing. It may offer more security than investing in stocks, but you have to put the work in to generate an income.
So what do you need to learn before you invest in a property? Here are some things you must know about property investment for beginners.
Issues #1 –How Much You Can Borrow
You need to know how much you have to spend before looking for an investment property. If you don’t, you run the risk of finding the perfect property, only to discover that you can’t afford it.
You can get a general idea for how much money you need when buying an investment property.
Calculator websites allow you to enter some figures to produce a rough estimate. They’ll ask about your income, in addition to any expenses you currently incur. These include everything from your debts, through to the dog food you buy each week.
However, you won’t know for certain until you speak to a lender. Most importantly, you must find out how much of the property value you can borrow. This will tell you how much money you must raise for your deposit.
Issue #2 – Your Investment Plan
Most people approach property investment with a simple end goal. They want to make enough money from their property to quit their jobs. However, many don’t really understand what this means. Enough money for one person may not be enough for another.
So, you need to have a plan in place before you start investing. Work out how much income you need your investments to generate before you can live off the proceeds.
This is your real goal. A vague notion of early retirement won’t keep you focused. You need to know exactly what you’re shooting toward before you invest your money.
Issue #3 – The Different Types of Gearing
You may have heard of gearing, without really understanding the concept. You need to learn what gearing is to create a strong investment plan.
There are three types of gearing: positive, negative, and neutral. Positive gearing means that your property generates enough income to cover its expenses, with money left over. You have to pay tax on your income when you have a positively geared property.
Negative gearing means your property doesn’t generate enough money to cover its costs. This may sound like a bad thing. However, you can use negative gearing to your advantage. Many investors offset the losses their properties make against other income sources, such as their salaries.
As the name suggests, neutral gearing means the income covers the costs. You don’t make any profit, but you don’t lose money either.
Issue #4 – The Choice Between City and Rural
There’s a huge difference between city and rural properties. City properties give you access to more people, which makes it easier to fill vacancies. However, rural properties allow you to charge higher rents. You can also buy rural properties for less money.
So, which do you choose? It all comes down to what you want to achieve. City properties tend to enjoy higher capital growth than rural properties. However, it’s easier to positively gear a rural property.
You need to do your research before creating any property investment strategies. Australia offers all sorts of opportunities. Consider area population, local economies, as well as demand when choosing where to buy your property.
Issue #5 – Who Provides Legal Advice?
You’ll have a choice between conveyancers and solicitors when looking for legal advice. Both work in law, but they’re slightly different.
Conveyancers focus solely on property law. They’re highly specialised, but won’t be able to help you with any issues that aren’t directly related to the property. Solicitors offer well-rounded knowledge on a range of issues. However, they also cost more money.
Your choice depends on the property. If you anticipate a lot of legal issues, hire a solicitor. This usually costs between $2,000 and $3,000.
A conveyancer costs approximately $1,000. Use these professionals if you anticipate a simple transaction.
Issue #6 – Your Exit Strategy
You should achieve success with proper planning. However, that doesn’t mean that you don’t need an exit strategy.
Your exit strategy determines how you’ll generate a profit from your investment. For example, you could decide to sell after a set amount of years to take advantage of capital gains.
Alternatively, your exit plan may involve benefitting from the rental yield until you retire. Upon retirement, you could move into the property, rather than sell it.
The main point is that you need to know how you’ll exit the investment. If you don’t, you can’t take full advantage of the property during your ownership period.
The Final Word
Investing in property could help you to enjoy a greater level of financial comfort. However, poor preparation will lead to mistakes and potential losses. You need to know how to maximise your investment before you commit your money to a property.
Washington Brown can help you with that. Our Quantity Surveyors can help you to calculate how much you can claim in depreciation. Get in touch today to find out more.
Depreciation and Natural Disasters: Everything You Need To Know
A natural disaster could have a devastating effect on your investment property in Australia. You may need to get a new depreciation schedule to account for any repairs you make. Here’s what you need to know.
You cannot underestimate the effects natural disasters can have on an investment property. Australia deals with such disasters, and other issues, on a near-yearly basis. If such an issue affects your property, you may have to undergo a period of rebuilding. You’ll need to replace any assets you’ve lost, and possibly renovate or rebuild parts of your investment property in Australia.
This could make you wonder how natural disasters affect your rental property depreciation rates. On the one hand, you may have to pay out of pocket to bring your property back up to code.
After all, your insurance policy may not cover unforeseen circumstances. On the other hand, any improvements you make to the property improve its value. Your construction work could allow you to make more tax deductions. Australia has various regulations that ensure full compliance in such situations.
There are three situations you may find yourself in following a natural disaster. You’ll usually have to do at least one of the following:
Repair any damaged assets
Replace damaged assets that you cannot repair
Improve or upgrade an asset in the wake of the disaster
You must approach each situation differently to maximise your ability to claim depreciation. Let’s look at each individually.
Repairing Your Assets
Repairing an asset involves any work you undertake to bring the asset back to its original condition. This generally includes minor work only.
If you make any improvements to the asset, you cannot claim it as a repair. This includes any physical changes to its appearance, or altering the asset’s functionality. These are upgrades, and you must treat them as such.
So, what can you claim for when repairing an asset? It differs depending on whether you have insurance.
If you have insurance, you can claim for the cost of repairing the asset. However, you must also declare any sum you received from your insurance policy. This will have a direct effect on your tax deductions. Australia does not allow you to claim the full cost of the repair if you have insurance.
However, those without insurance can claim the full cost. This is because you won’t have received any help in making the repair.
Replacing Your Assets
On the face of it, replacing an asset seems simple. If you can’t repair your previous asset, you must purchase a replacement. You can then claim for this replacement on your tax returns.
However, the issue of improvement comes into play again. The asset you purchase must have the same specifications and functionality as the damaged asset. Any improvements move the asset into the final category, which changes how you claim for it. Simply put, if the replacement isn’t like-for-like, it’s an improvement.
If you have insurance, you have to make several adjustments to your depreciation report. You have to account for both Capital Allowance, and Individual Depreciable Assets.
Those without insurance must scrap the depreciation value of the previous asset. Replace this with the new forecast for the replacement asset.
Making Improvements or Upgrades
Anything that improves the original asset is either an improvement or an upgrade. This includes changes to appearance and functionality. You may also have to claim on the asset as an upgrade if it has different specifications to the original asset.
So, how do you handle the depreciation? If you have insurance, you take the same action as you would when replacing an asset. Adjust your depreciation report to account for the Capital Allowance. Don’t forget the Individual Depreciable Assets either.
If you haven’t got insurance, you must get arrange a new depreciation forecast for your improved asset.
Working with a Quantity Surveyor
In all cases, work with a Quantity Surveyor to make your adjustments. These professionals will help you to forecast your depreciation tax deductions. Australia is home to many Quantity Surveyors, so do some research before selecting somebody.
The role your Quality Surveyor plays depends on your previous actions. If you had your property assessed before the disaster, your surveyor will make minor adjustments to your previous report. This costs less than a full report.
However, you will need a full depreciation report if you didn’t already have one. This takes some more time and money. However, the report will ensure that you claim all the depreciation you’re eligible for.
The Final Word
A Quantity Surveyor can help you to maximise your depreciation claims after a natural disaster. Arrange a survey as soon as possible to ensure you don’t lose more money than you have to.
Washington Brown maintains a team of expert Quantity Surveyors. Contact us today to find out more.
Investment risk and uncertainty in the real estate housing market
Before starting your career as a property investor, you need to arm yourself with more than the property investment basics. If you don’t, you may end up making some costly mistakes.
Investing in property is more difficult than you might think. It’s certainly a more reliable way to generate an income than other types of investment. However, that doesn’t mean that there aren’t any risks involved. In fact, approaching property investment without a plan could result in you losing a lot of money.
As a result, you need to learn more than the property investment basics before you move forward. There are all sorts of mistakes you could end up making when investing in property. For beginners, these mistakes could lead you to financial ruin.
Mistake #1 – Using Emotion to Make Decisions
Think back to when you bought your first home. What were you looking for? Most buyers look for something that draws them to the property. They may have specific features in mind, or they fall in love with the décor.
This leads to them making decisions based on emotion. This is fine when buying for yourself, but it causes major issues when buying investment property. Australia has millions of people who don’t think like you do. They’re your potential tenants, so you have to buy with them in mind, rather than yourself.
Basing your decisions on emotion means you may spend too much on the purchase. It also blinds you to what your prospective tenants would want. Instead, you need to think about the needs of your target market. If the property doesn’t cater to them, move onto the next opportunity.
Mistake #2 – Failing to Manage Your Cashflow
While the property investment basics often cover how to find a good property, they don’t always focus on issues like cashflow. The fact is that property investment is a business. As a result, it comes with the same pitfalls as operating a business.
You need to understand all the additional costs that come with your property. For example, you have to account for how much the property will cost when it’s unoccupied, as well as when it has tenants. Unexpected maintenance can also place a burden on your finances. Of course, there’s also the issue of tenants failing to pay on time. All these problems affect your cash flow.
Many investors recommend holding back a tenth of your property’s value to cover such issues. If you don’t, you may find that the unexpected costs lead to failure. An investment property cashflow calculator could help you to stay on track.
Mistake #3 – Going it Alone with the Mortgage
You may think you can handle the stress of finding a mortgage for your investment property. However, this is usually a mistake.
Going it alone often means that you miss out on some of the best financing options. Remember that lenders want what’s best for them, ahead of what’s best for you. The wrong financing can come back to bite you later on. You may end up paying more interest than you ought to. Or, you may not have access to special loan features that could help you.
As a result, it’s best to work with a mortgage broker when searching for a home loan. Their expertise may prove invaluable. Plus, they can often provide access to mortgage products you wouldn’t find on your own.
Mistake #4 – Not Finding Out About the Seller
The seller’s situation will affect how you approach negotiations. However, many investors don’t even try to find out more about the seller.
Most sellers won’t give you a direct answer if you ask why they’re selling their property. However, that doesn’t stop you from looking for clues. For example, you can use your property inspections to look for signs of poor maintenance. This often suggests that the seller is undergoing some personal or financial hardship.
You can use this information to strengthen your negotiating position. It may seem cruel, but remember that investment is a business. Don’t allow your emotions to prevent you from getting a great deal.
Mistake #5 – Not Doing Adequate Research
The need for research is one of the property investment basics. However, plenty of investors fail to learn as much as they can about the property market before spending their money.
Reading a book or two won’t equip you with the knowledge you need. You have to learn about the specifics of the property’s area to stand any chance of success. Talk to local estate agents and people in the surrounding neighbourhood. Research property prices to ensure you’re getting a good deal. Most importantly, find out what the area has to offer that might appeal to your tenants.
This will take time, but it’s worth it. Quality research lowers your risks, which increases the chances of achieving success.
The Final Word
Many novices make some critical mistakes when entering the property investment sector. They only read about the property investment basics, which results in them crashing and burning. In the end, they end up losing thousands of dollars.
You must avoid these mistakes. Furthermore, you need to consider the tax implications of owning an investment property. That’s where Washington Brown can help. Speak to a Quantity Surveyor today to find out more about claiming for the depreciation of your assets.
Many see granny flats as an easy property investment. For beginners, they offer the opportunity to start investing, without spending too much money. As with any investment property, you must remember to claim for the depreciation of your assets.
Tons of people like the idea of buying an investment property. Australia offers plenty of opportunities, but many struggle to get over the initial financial barrier.
You may find yourself asking how to invest in property with little money. A granny flat may be the answer. They cost less than most other types of investment property. Plus, you still get to claim for the depreciation of the property’s assets.
So, what are granny flats, and how can you claim for their depreciation? This article will help you to answer those questions.
What is a Granny Flat?
You can think of a granny flat as a secondary home on your property. They’re usually self-contained extensions that come with a lot of the features you would expect in an apartment.
The difference is that the granny flat is on your land. As a result, you have far more control over it.
Most people build their granny flats behind their properties. After all, the back yard is a perfect space to extend into. The flat itself will usually contain the following:
A general living space
This makes them ideal for all sorts of tenants. The name “granny flat” should tell you that they’re perfect for elderly tenants. However, that’s not the only use for this type of investment property.
Australia is full of young people who view granny flats as an affordable way of achieving their independence. Your own children may find the idea of moving into a granny flat more appealing than staying at home.
They’re also a cheap way to enter the investment sector. On average, a granny flat costs about $120,000 to build. In return, you could enjoy a yield of up to 15% on the property.
You do, and they depend on the state you build the granny flat in. Each has its own rules with regard to size. For example, a granny flat cannot exceed 60 metres squared in New South Wales. However, you can build up to 90 metres squared in the Australian Capital Territory.
Exceeding these limitations changes the status of the granny flat. This could have an effect on how you claim tax deductions. Australia has several states, so you need to get informed before you start building.
Claiming Depreciation on Granny Flats
There’s one key question you must ask when buying an investment property: what can I claim? Granny flats are no different. Just because you’ve built the property on your land, doesn’t mean that you can’t claim depreciation.
As a secondary dwelling, a granny flat must produce an income before you can claim depreciation. Assuming that’s the case, you can claim depreciation for capital works. These include the wear and tear the structure undergoes during its lifetime.
You can also claim for plant & equipment depreciation. In a typical granny flat, this means you can claim depreciation for the following assets:
The hot water system
Air conditioning units
Curtains and blinds for the windows
A range of kitchen appliances and assets
The bathroom’s freestanding assets
You can also claim depreciation on the areas the granny flat shares with your home. For example, you could claim for a pool or a patio, assuming the tenant uses these assets.
As you can see, that covers a lot of ground. In fact, research suggests that you could claim over $5,000 in depreciation on a granny flat for the first year of ownership. This figure increases to almost $24,000 over the first five years. That’s about one-fifth of the value of the average granny flat, in just five years.
The Final Word
As you can see, granny flats offer high yields and plenty of opportunities to claim for depreciation. That’s why they’re considered one of the best options when it comes to property investment for beginners. Manage the flat correctly, and it could generate thousands of dollars in income in a short time.
However, you need help to create a full depreciation schedule. Without the help of a Quantity Surveyor, you may end up failing to claim for the full depreciation of your assets. Contact Washington Brown today to get a quote for a granny flat depreciation schedule.
You have a choice to make when investing in real estate. Commercial properties may be more difficult to manage than residential homes. However, there are plenty of reasons why you should invest in commercial property.
So, you’ve decided to invest in real estate. Commercial properties may not seem like the best choice. They come with more complications than residential properties. This means you need to know more than the property investment basics. However, many argue that the benefits of commercial property outweigh the complications.
When investing in real estate, commercial properties may offer more security. However, there are plenty of other reasons for why you should consider them as an option.
Reason #1 – Stronger Yields
What rental yield should you aim for? This is a question that plagues many property investment novices.
Residential properties tend to offer lower yields. According to CoreLogic RP Data, you’ll achieve an average yield of 3.6% on a city-based residential property.
You can expect to earn anywhere between 8% and 12% yield on a commercial property. As a result, commercial real estate will often generate more income than a residential property.
Reason #2 – A More Secure Income
People often focus on risk when discussing commercial property. In particular, they concentrate on the issue of attracting tenants. You need to consider the needs of people in the local area. How your property caters to businesses relevant to those needs is also a factor. If your property doesn’t fit the bill, you’ll find it difficult to attract commercial tenants.
However, many ignore income security. With a residential property, you may find that a tenant leaves after six months. This means you have to go through the process of filling the vacancy again.
By contrast, a commercial lease lasts between three and 10 years. This means your property generates more income for a longer period of time. As a result, you can feel more secure in your income, and as a result make other investment decisions with more confidence.
Reason #3 – Rate Payments
You’ll often take on the responsibility of paying various rates with a residential property. In addition to council and water rates, you may also have to cover body corporate fees.
This isn’t an issue with commercial real estate. Commercial tenants will handle the rate payments for you. As a result, you spend less on the property each month.
Reason #4 – The Tax Benefits
Though you’ll enjoy various tax benefits with residential real estate, commercial properties have even more to offer.
Beyond capital works depreciation, you can also claim depreciation on plant equipment. This includes depreciation for air conditioning units and light fixtures. You can even claim for things like the carpet.
That’s not all. Commercial properties also offer strong building allowances, which you can use to reduce the amount of tax that you pay.
Reason #5 – A Lower Initial Cost
Commercial properties often cost less than residential properties. This is despite the potential they have to generate higher yields. For example, you may spend $100,000 on a commercial car park. By contrast, a small residential apartment could cost as much as $500,000.
As a result, you need to raise less money to get on the commercial investment ladder. Let’s assume you can get a loan worth 80% of the property’s value. That means you only need $20,000 to place a deposit on the commercial car park. The apartment deposit would cost $100,000.
Reason #6 – Protection Against Inflation
Inflation can have a massive effect on your property investments. If inflation rises, tenants have less money. With a residential investment, this leads to higher vacancy rates. You’ll also struggle to raise rents because tenants can’t afford higher prices.
You’ll deal with similar struggles when investing in commercial real estate. However, commercial yields tend to outstrip inflation. As a result, you have more protection when inflation becomes an issue. Even if you can’t raise your rents, a commercial property should still generate an income.
Reason #7 – You Can Rent and Own
Let’s assume you’re a business owner. You may want to buy an office, but that won’t make any money for your company. However, leasing means that your money goes straight into the pocket of an investor. What can you do?
With commercial property, you can own the property you rent. You can make the purchase itself using a self-managed superannuation fund (SMSF). Your business then moves into the property, during which time it pays rent into the SMSF. As a result, you essentially pay yourself, rather than a landlord, for use of the property.
The Final Word
There are many reasons to invest in commercial property. However, you need a high level of expertise to make the most of your investment.
Washington Brown can help with any depreciation concerns you have. Contact us today to find out how our Quantity Surveyors can help you to get more out of your commercial property investment.
Find out What Capital Works Are and How You Can Claim Them
Not all people buy an investment property in Australia and leave it just the way it is. Many invest in improvements, so they can charge more rent to tenants. Buying a property and making improvements to it is one of the best investment property tips for beginners in its own right. But did you know there are plenty of tax deductions in Australia that you can claim for the extra features you build?
It all comes down to capital works. Also known as Division 43 of the Income Tax Assessment Act (ITAA), capital works relates to the work and materials you spent money on to build the house.
Such costs include the following:
The materials you use in construction, such as timber and tiles
New extensions, such as a garage
The construction of internal walls
Excavation of new foundations for your construction work
Improvements to the property’s structure, such as a new carport or fencing for the garden
Renovations to the bathroom and kitchen
Beyond these practical costs, you can also claim tax deductions in Australia for some of the fees associated with construction. For example, you can claim for the fees you pay to surveyors, architects, and engineers. Additionally, you could also claim for the money you spent on acquiring building permits for the work.
Can I Claim Capital Works?
It depends on your situation. Your building needs to generate income, which means it must be an investment property in Australia. If the building has produced income within one financial year of your claim, you can claim tax deductions as part of Division 43 of the ITAA.
As for your own status, it can vary. You could be an individual investor or member of a trust. Companies can also claim for capital works, as can the managers of superannuation funds.
How Do I Calculate My Capital Works Deductions?
The first thing to remember is that any valuations you have for the work are not relevant. Your capital works tax deductions in Australia must relate to the actual construction costs.
There are two rates may apply to your capital works – 2.5% and 4%. Which of these is relevant to your work depends on several factors. These include when you started construction, how you use the capital work, and the type of work undertaken. Furthermore, you have to take the amount of time the capital work generated an income for during the last financial year into account.
It’s best to speak to a professional to find out which rates apply to your capital work. Making claims you’re not entitled to could land you in trouble.
How Do I Make a Claim?
You can make claims for tax deductions in Australia on any capital works for a maximum of 40 years after the construction completion date. However, you’ll also have to provide several details in your claim, which include the following:
Information about the type of capital work undertaken
The start and end dates for construction
Information about who did the work
The actual cost of construction, which is not the same as any valuations or purchase prices you have
Information about how the capital work generated an income for you during the last financial year
Sometimes, it’s difficult to determine the actual construction costs. You may have lost some receipts along the way, which means you need an estimate. This must come from a quantity surveyor, or an independent third-party who holds similar qualifications to a quantity surveyor.
The estimate your quantity surveyor produces will consist of a schedule for all the capital works undertaken. It also creates a forecast for the tax deductions in Australia that you can claim on the work. Take this schedule and use it to complete your tax returns. Also, bear in mind that the estimate cannot come from a real estate agent or accountant. The Australian Taxation Office (ATO) will refuse your claims if your estimate comes from the wrong source.
How Does Capital Gains Tax Relate to Capital Works?
Any capital works that you claim must be taken into account if you decide to sell the property. You will use them to figure out your capital gains or losses.
You must deduct your capital works claims from the base cost of the home. The amount of these deductions will affect the amount of Capital Gains Tax (CGT) you pay. If the deductions result in you making a loss on the property, you may not have to pay any CGT.
Don’t Be Put Off Because You Can’t Explore The Property
There are many things you need to consider when buying an investment property in Australia. While the process may be exciting, it can also be confusing.
One of the main choices you need to make relates to the type of property you buy. Do you purchase an older property that has a track record of generating income, or a brand new property that may stand a better chance of meeting the demands of tenants?
What if we told you there’s another way? Instead of buying a property that already exists, you can buy one that’s under construction. This idea may stray away from the property investment basics that you’ve read about while working out the complexities of investing in property for beginners. However, we can offer six reasons for why an off-the-plan property could prove to be a wise investment.
Reason #1 – Earn Early Capital Growth
What’s one of the first investment property tips for beginners that you’ve heard? It’s probably to buy low now so you can make a profit later. Buying an off-the-plan property allows you to do just that. So how does it work? It’s simple. You pay a deposit to the developer, and this secures your ownership of the property.
However, the construction settlement date may be several years in the future. As a result, you can earn capital growth for the home, even during the period prior to construction. You won’t even have paid the full price of the property before it starts making money for you.
Reason #2 – Stamp Duty Savings
Buying an investment property in Australia comes with a lot of added fees. The largest of these is often stamp duty. In most states, you will have to pay thousands of dollars in stamp duty before you can take ownership of the property. Take Victoria as an example. For a property worth $500,000, you’ll have to pay almost $20,000 in stamp duty.
Buying off-the-plan can help to avoid this major fee. Most states don’t charge stamp duty on properties that don’t exist yet, which means you make thousands of dollars in savings from the beginning.
Reason #3 – Extra Saving Time
You only have to put down an initial deposit when you buy an off-the-plan property. As we mentioned before, you may have to wait for a couple of years before construction finishes.
This gives you plenty of time to save some money. Once construction ends, you could have thousands of dollars that you wouldn’t have had if you’d bought an existing house. You can then put this money toward your home loan, reducing the principal so that you pay less interest on the loan over time.
Reason #4 – You Can Claim Depreciation
You may be planning on renting out your off-the-plan property when construction ends. If so, you may be able to claim thousands of dollars in tax deductions in Australia on the property.
Make time to create a depreciation schedule with the help of a quantity surveyor. This will highlight all the things that you can claim as depreciation upon completion of the property. This may include the new furniture and fixtures that you add to the property before making it available to tenants. The higher the depreciation, the lower your holding costs.
Reason #5 – You Can Pick the Perfect Plot
Showing early interest in a new development comes with its own advantages. In addition to benefitting from the lower prices that developers often charge to their early investors, you also get to choose from the best plots of land.
This will benefit you monetarily when construction ends. Getting in early means you can pick the property that will have the best views or offers the amenities that your tenants will want. As a result, you can charge higher rents, so your property generates more income.
Reason #6 – Reductions in Other Costs
A brand new property does not come with the maintenance needs of an old property. That should go without saying. You won’t have to earmark thousands of dollars for repairs, as the property should be good to go from the moment construction ends.
However, did you know that off-the-plan properties could save you money in other areas? It’s all thanks to recent changes in the Australian Building Code. New properties must now meet several energy efficiency criteria. This means the cost of utilities falls, which benefits both you and your tenants.
The Final Word
Buying off-the-plan may seem scary at first. After all, you don’t have the opportunity to explore the property before you buy it.
However, it opens the door to savings that you wouldn’t have access to with an existing property. To find out more about buying an off-the-plan investment property in Australia, contact Washington Brown today.
The fee you’ll pay for a depreciation schedule will vary. For example, you may pay anywhere between $275 and $800 for the report. This is a fairly standard price for an established residential home. All these properties aren’t brand new. This usually means you’ve purchased it from another investor or a former owner-occupier.
What causes this variance in price? It usually comes down to the quality of the service that the quantity surveyor provides. Paying less may mean that you save money in the short-term. However, it could also result in you claiming fewer tax deductions for your investment property in Australia.
To find out exactly how much a depreciation schedule for your own property will cost – request an obligation-free quote from our tax depreciation specialists here.
The Timeline Process
You’ll need a depreciation schedule for any established investment property in Australia. This allows you to create a timeline that contains details about the property’s history. These details usually include information about the property’s renovation work. Either you or the previous owner may have carried out this work. It will also mention the cost of that work, along with the completion date.
Your surveyor does this so you can assign a new depreciation life cycle to your second-hand assets. However, you can only do this on assets in a property that you purchased before the 2017 Federal Budget. You may not be able to claim tax deductions on the plant and equipment within a property that you bought after May 9th, 2017. The good news is that deductions on the structure of your property are unaffected!
The purpose of your timeline is to show what tax deductions in Australia you can claim. It will also create a schedule for these claims. This allows you to maximise the depreciation of your second-hand assets.
What Do I Get at the Lower End of the Scale
Let’s assume that you have decided to work with a quantity surveyor who only charges $300. That’s a few hundred extra dollars in your pocket, but the schedule you receive may not be as detailed as you would like.
For example, most surveyors at the lower end of the price scale don’t usually provide the following:
The option to use low-value and low-cost pooling to increase the amount you can claim
Completion of additional searches that would have helped to find approved works by previous owners that you can claim for
Full itemisation of the individual assets contained in the property
Adjustments of the effective lives of your second-hand assets
Furthermore, you may find that a cheaper surveyor does not have the relevant skills or experience. As a result, you don’t get the most out of your assets. You’ll still get a depreciation schedule. However, it won’t allow you to claim as many tax deductions in Australia as you may be entitled to.
What Do I Get With a More Expensive Surveyor
More expensive surveyors tend to provide better depreciation schedules.
You’ll receive all the following if you pay more for your depreciation schedule:
A completely accurate estimation of every tax deduction in Australia you can make
Access to more knowledge with regard to the latest tax legislation
Checks to ensure your depreciation schedule meets the Australian Taxation Office (ATO) requirements
A more reliable point of contact to ask questions
Such surveyors also have more experience, which they can use to your advantage. It’s unlikely you’ll present them with any scenarios that they aren’t familiar with.
What about Brand New Properties?
That covers any second-hand assets that you have in an established residential home. But what if you’ve bought a new property? These won’t contain any second-hand assets that need reporting on.
As a result, you can expect to pay less for your depreciation schedule. This is because most newly built properties come with more information. Your surveyor can use this to create more accurate estimates. They’ll have access to the costs of construction, floor plans, and, at times, even the value of the assets that came with the property. This means they don’t have to carry out the detailed inspections that they would to estimate the value of second-hand assets in an established home.
Even with this lower cost, you will still receive the same level of service. The depreciation report will apply the new assets the home contains to either an immediate or long-term pool. This ensures you can claim the maximum tax deductions in Australia on your property.
How Much Does a Depreciation Schedule Cost for a Commercial Property?
Prices may vary for commercial properties. After all, larger commercial properties require more work than regular-sized residential properties.
Schedules for small offices cost about the same as you’d pay for a residential report. However, the price may increase along with the size of your property. Even so, it’s worth getting a depreciation schedule. Not only will it help you with asset deductions, but you can deduct the cost of the schedule from your taxes as well.
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