Not Knowing which expenses are deductible and how to maximise them
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
The tax rules around deductibility of expenses for rental investments can be quite gnarly and you do need to have a good knowledge of the tax legislation to make accurate assessments on these.
Making a mistake in this area can be costly and may cause you to upset your long-term holding strategy. Some expenditure can become “black hole expenditure” where it is neither deductible nor depreciable, which is definitely not the outcome that you want.
When you are calculating your rental investment profit/loss and cashflow needs, there are normal rental expenses that can be claimed such as described by Phil in his chapter on positive cashflow. However, some items affect your cashflow but cannot be deducted for tax such as repayments of principal.
We want you to be claiming all the rental expenses available to you under the Income Tax Act and ensuring you don’t pay any more tax than you need to, this is called tax minimization.
We have a detailed rental deductibility table available which shows exactly what types of expenses can be deducted and situations where the deduction is limited or not available. Please email [email protected] if you would like a copy.
Here are some of the most common errors and issues you need to watch out for.
Maximising Expense claims:
Interest deductibility – I won’t go into too much detail here but it is really important to get good advice before you purchase a property, to ensure you get the full interest deduction.
Purchasing a $600,000 property by using your savings to pay the deposit and then later re-borrowing that money to renovate your own home.
May result in (if you need a 30% deposit say) loss of interest deduction on $200,000, therefore up to $3,300 in tax deductions.
Whereas if you get the right advice from your accountant this tax deduction would be available to you.
Another area that can create some problems is if you decide to rent out your family home and purchase a new family home, this needs to be carefully structured to avoid losing interest deductibility.
In our experience, bank employees do not have a good knowledge of structuring your borrowing for success, and we have even found that they have advised clients incorrectly just to make it easy for them. Ensure you talk to your accountant or if you don’t have one come in for a free meeting with us at Monteck Carter. We work closely with your mortgage broker, who will understand the need for good advice.
Legal Fees – There are times when these are deductible and when they are not, please get advice on your situation to ensure you get the deduction if you can.
Repairs and Maintenance – There are complex rules around when these can be deducted and when they become capital items which cannot be deducted, and may not be depreciable. This can depend on:
· the timing of the spending.
· how the repairs are managed, eg. direct replacement vs improvement.
· Chattels are depreciable but capital additions are not so knowing the difference is important, and this is not clear cut.
In summary the general rule for deducting an expense is that you must be able to relate it back to your ability to earn the income.
However, the specific rules that apply are not so simple and are regularly changing as the government of the day seeks to slow down the property market.
With the experience we have at Monteck Carter of dealing with many rental property clients over more than thirty years, you can be sure that we know what we are talking about and will give you the best advice possible.
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