– When taking out or refinancing a loan for an investment property the tax deductibility of the interest is determined by the use of the money, not the security used. The security for the loan could be your own home or personal assets. However it is best to use any available cash to buy a home and pay for personal expenses and opt for borrowed funds to acquire investment properties.
– If extra repayments are made on an investment loan and the redraw facility on the loan is used to take out money for private purposes, any interest attributable to the redrawn funds will become non-deductible.
– Any costs associated with taking out a loan cannot be claimed outright but must be claimed over either the lesser of five years, or the term of the loan.
– Any travel expenses for property inspections are deductible if the main purpose of the trip is to visit the property.
– When properties are held jointly the net rental income or loss must be split in the correct percentage according to ownership.
– The difference between depreciable assets and capital works needs to be understood. For example, while a cooktop, stove and dishwasher are depreciable, kitchen cupboards and sinks are not, and only eligible for the 2.5% building allowance.
– Landlords can depreciate property owned by the body corporate such as carpets in the common area.
– Landlords who have lived in the property can claim a capital gains tax (CGT) exemption in certain circumstances when they come to sell the property, as long as they have no other main residence during the same period.
– In addition to income tax considerations factors such as asset protection, retirement and estate planning, financing and CGT when the property is sold must also be considered when deciding on ownership of the investment property.
– If use of a family company or trust is considered other issues arise. These include the different capital gains rules for companies and trusts, the relevant land tax rules and the effects of negative gearing. Compliance costs (both set-up and ongoing) must also be considered although in some instances there are good reasons to set up an entity such as a family trust. It is imperative to consider the ownership structure before the investment is made as it can be very costly to transfer assets later.
Peter Bembrick, tax partner at accountants and advisers HLB Mann Judd.