Essential tax tips for property investors

With tax time upon us, here are some handy tips to help minimise your taxable income and potentially save you thousands of dollars.

It’s important for all property investors to know what they can claim as a tax deduction to ensure their income, and subsequently personal wealth, are maximised. Knowing what you’re entitled to claim could save you hundreds or even thousands of dollars.

Here are some basic property investment tax tips to help maximise your returns this financial year.

Property investors can claim “plant and equipment” items on investment properties as depreciable articles – these are treated separate to the dwelling.

Items are considered “plant and equipment” depending on a number of factors, such as how permanently the item is attached to the land or building.

A list of items considered “plant and equipment”, as well as their depreciation rates, is available from the Australian Tax Office

Items that you can typically depreciate in your investment property include:

• Carpets
• Air-conditioning units
• Appliances, such as ovens and hot plates
• Security systems
• Blinds
• Ceiling fans

If you have purchased an investment property, any of these existing items considered “plant and equipment” can be claimed depreciable. However, you first have to determine the purchase cost of these individual items.

There are three ways you can do so.

• You can specify it in the purchase price of your investment property
• You can make your own reasonable estimate of the value of the asset included in the purchase price
• You can obtain a value through an independent valuer, or depreciation expert

Momentum Wealth recommends in most cases that clients obtain an independent valuation from a depreciation expert.

Aside from “plant and equipment”, property investors can claim some items associated with the dwelling in certain circumstances.

The dwelling on an investment property is not normally considered to be a depreciable item because it‘s not “plant and equipment”. However, some provisions have made the cost of constructing buildings, and other capital items incurred in rental properties, to be depreciable in certain circumstances.

For example, “construction expenditure” on an investment property that produces an income can be written off at 2.5% per annum. For residential property, this applies if the construction commencement date was after 15th September 1987 .

The term “construction expenditure” is related to expenditure on the dwelling and includes preliminary expenses, such as architect and engineering fees, among other items. This does not include demolition costs, clearing of land or landscaping, though.

Property investors can also claim travel expenses in some instances.

Transportation, meals and accommodation can be deductible for numerous reasons, including preparing the property for rent, rent collection or for inspections and maintenance.

This is even the case with investment properties located interstate. Property investors can claim the cost of flights and accommodation as a tax deduction in some instances. Be careful though – if you take a holiday at the same time, the ATO may argue the dominant purpose was to have a holiday and the trip may not be deductible.

7 steps to a multi-million dollar property portfolio

The large majority of Australian property investors own only one investment property – so how can you stand out from the pack and build a multi-million dollar portfolio?

Many first-time investors have grand plans of building a large property portfolio, in many instances as many as 6, 8 or 10 properties, or even more.

While such goals are realistic and obtainable for many, the large majority of investors (72% according to statistics from the Australian Taxation Office) only own one investment property.

The key to building a multi-million dollar property portfolio is to follow 7 key steps.

The first step to building a massive property portfolio is to create a long-term plan. This will clearly state your property investment goals and outline how these can be achieved.

Your property investment plan should include your risk profile, current life/professional situation and financial capacity.  You can then develop a long-term plan identifying the types of properties suited to your portfolio (villas, development or commercial, for example), the estimated time frames you can achieve those goals and what steps you need to take to achieve them.

The second step is to adequately organise your finances.

Most banks and brokers aren’t aware of the proper finance structure needed to build a large portfolio so it’s important that you deal with a broker who specialises in investment properties. This is particularly pertinent for cross collateralisation.

The third step is one of the most crucial – the acquisition of your investment property. The performance of the property you choose will have a significant impact on the timeframe you can purchase your next property, so choose wisely.

Choosing an investment property requires a huge amount of time and research, including detailed analysis of suburbs and the individual property. You need to identify areas that exhibit strong capital-growth drivers, such as economic activity, transforming demographics or infrastructure projects, and focus on these.

Once you’ve purchased your property, the forth step is to consider add-value opportunities that will help you increase its value. This can be done through renovation or development.

The fifth step is to effectively manage your property to achieve maximum returns. It’s wise to utilise the services of a professional property management business.

More often than not, the level of service you receive will be reflected in the price you pay. A good property manager will keep you up to date with market rent reviews and provide advice to optimise your assets.

The sixth step is to continually grow your knowledge of the property market. Stay informed by attending relevant seminars, reading industry-specific publications and stay in touch with like-minded property enthusiasts.

The seventh, and final, step is to regularly review your property portfolio. This will help to you stay focused on your property investment plan, keep your assets optimised and, ultimately, achieve your goals.

Once you’ve reached the final step you can start the 7-step process again to purchase successive investment properties until you’ve reached your long-term goals.

Education and employment hubs aplenty

St James – This suburb is close to a major education hub as well as the Perth CBD and would greatly benefit from a slated light-rail system.

St James is located within the City of Canning and has a population of about 4,500.

Being located next door to Curtin University’s Bentley campus – the western border of St James is less than 500 metres to the campus – the suburb has a high concentration of younger residents with a median age of 30 years.

Subsequently, about 47% of properties in St James are leased, often to university students.

As well as being in close proximity to the university, St James is also just 7 kilometres from Perth’s CBD and is connected by Albany Highway, which runs through the suburb to East Perth.

The Welshpool and Cannington industrial zones are also other significant employment hubs that are nearby.

The suburb’s major retail hubs are the Bentley Shopping Centre and the Cannington retail area, however the larger Carousel Shopping Centre is just a few kilometres down Albany Highway.

Zoned mostly low-density residential (R30 and under), St James has more than 75% of dwellings listed as houses.

The suburb is well serviced by high-frequency public bus transport, primarily because of its proximity to Curtin University.

A light rail project slated for the area, which would service the university and Perth CBD, has been deferred but remains part of the long-term development plan.

There are also some pockets of state housing, which investors must be aware of.

In addition to the university, St James also has multiple primary schools nearby.

Spend a little now to save a lot later

Its news that everyone dreads – your property manager calls saying something needs repairing and it will be expensive. However, there are ways to mitigate this scenario.

Owning a large property portfolio can deliver huge financial windfalls, but just like a business, there are many associated costs that investors need to be aware of, including general maintenance.

Maintenance costs should be considered even before purchasing a property because if you can’t afford the maintenance you can’t afford the property.

Some property investors will ignore maintenance issues simply because they don’t want to spend the money.

However, more often than not, tending to minor maintenance issues now will prevent much larger problems in the future, and could potentially save you thousands of dollars.

This is why property investors need to create a maintenance plan and factor in ongoing maintenance costs to their budgets.

Specific areas that are prone to wear and tear or natural deterioration should be identified and a program of maintenance should be implemented.

For example, if you don’t want to do it yourself, budget for an annual gutter clean before winter.

By failing to do so, investors run the risk of their gutters becoming clogged with debris and may face rusting gutters, which will inevitably need replacing – an expensive exercise in any case.

Similarly, investors should also budget for regular tree lopping, replacement of carpets and fresh painting, among other items.

The amount of preventative maintenance needed will vary from property to property.

However, creating a simple maintenance plan and factoring these costs into your budget will help to avoid major unexpected costs in the future.

Massive profits through development syndicates

Property investors are cashing in on development opportunities following changes to Western Australia’s town planning laws.

The revised regulations, which have been driven at both the state and local government level, have led to a significant increase in property development opportunities in the Perth metropolitan area.

For example, many sites previously only suitable for villa and townhouse style developments can now be developed into small boutique apartments complexes.

Typically, these types of developments can contain 6 to 40 units across 2 or 3 storeys.

This higher lot yield has significantly increased the profitability of these specific sites.

In the past, these types of developments have usually been out of reach of the average property investor because of the huge upfront capital requirement.

However, with the advent of development syndicates, in which a group of investors pool their funds, more people can gain exposure to the huge profits that these types of projects offer.

Momentum Wealth’s development syndicate in Carine, just 12 kilometres north of the Perth CBD, is a great example of this.

This development was launched after Momentum Wealth clients invested $4 million into the acquisition of three development sites.

The result was a development of 16 apartments and three townhouses with a price range of between low $500,000’s to $1 million plus.

Most investors would not have the financial capacity, or know-how, to complete a project of this scale on their own.

However, the syndicate allowed them to pool their capital to access a high-return development opportunity. Furthermore, with Momentum Wealth project managing the entire development, the clients haven’t had to lift a finger.

Demand for these types of boutique apartment complexes in Perth is expected to increase in the coming years as many retirees want to downsize but remain in their local area, rather than move to an apartment in the Perth CBD.

The Carine development syndicate, for example, has been designed to a very high specification to cater for the ‘empty nester’ market. The project is also located in a highly desirable area close to the beach, bushlands and vibrant activity centres with café strips and retail precincts nearby.

Massive profits through development syndicates

Property investors are cashing in on development opportunities following changes to Western Australia’s town planning laws.

The revised regulations, which have been driven at both the state and local government level, have led to a significant increase in property development opportunities in the Perth metropolitan area.

For example, many sites previously only suitable for villa and townhouse style developments can now be developed into small boutique apartments complexes.

Typically, these types of developments can contain 6 to 40 units across 2 or 3 storeys.

This higher lot yield has significantly increased the profitability of these specific sites.

In the past, these types of developments have usually been out of reach of the average property investor because of the huge upfront capital requirement.

However, with the advent of development syndicates, in which a group of investors pool their funds, more people can gain exposure to the huge profits that these types of projects offer.

Momentum Wealth’s development syndicate in Carine, just 12 kilometres north of the Perth CBD, is a great example of this.

This development was launched after Momentum Wealth clients invested $4 million into the acquisition of three development sites.

The result was a development of 16 apartments and three townhouses with a price range of between low $500,000’s to $1 million plus.

Most investors would not have the financial capacity, or know-how, to complete a project of this scale on their own.

However, the syndicate allowed them to pool their capital to access a high-return development opportunity. Furthermore, with Momentum Wealth project managing the entire development, the clients haven’t had to lift a finger.

Demand for these types of boutique apartment complexes in Perth is expected to increase in the coming years as many retirees want to downsize but remain in their local area, rather than move to an apartment in the Perth CBD.

The Carine development syndicate, for example, has been designed to a very high specification to cater for the ‘empty nester’ market. The project is also located in a highly desirable area close to the beach, bushlands and vibrant activity centres with café strips and retail precincts nearby.