Some Tax Tips and free consultations for Property Investors

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Here are some words of wisdom from Henry Ohana who has kindly offered a 15 minute free phone consultation on tax planning matters to anyone getting a loan through Peach.

The increase in property values over recent years has encouraged many Australians to take advantage of increased equity in their own home by purchasing investment properties.

Yet too few investors understand the tax consequences of acquiring such investments.

This newsletter identifies some of the factors that existing or potential purchasers should consider when planning any purchase or divestment of investment properties.

Ownership Structure

Determining the most appropriate ownership entity of an investment property is crucial for both income tax and capital gains implications.

For the typical "mum and dad investor", there are three common ownership structures. These are as follows:

1. Own name - Here the title of the property is owned 100% by one person;

2. Joint tenants - Partners have an equal share on the title of the property - 50% each;

3. Tenants in common - Owners of a property have an undivided share in the property title (ie. owners may be 60% one partner and the other 40%), but partners don’t have an equal share.

The ownership structure affects tax implications for each party to the investment.

Since most property investors invest in property for passive income, they are deemed not to be running a commercial business. So it is their proportion of income and expenses in accordance with their ownership as per the title that is taken into account for their personal income tax purposes.

Another consequence of ownership structure relates to the capital gains tax on selling the investment property. The share of capital gain to the title-holder is again determined by the share of their legal interest in the property title.

Getting the right ownership structure at the outset of the investment is of paramount importance - as any readjustment of existing ownership has capital gains implications to each taxpayer.

Settlement Period

When acquiring a property there is usually a settlement gap of between 30 to 180 days from the date of signing the contract to the date of taking possession of the property.

Often, the contract signing can be in one financial year and settlement in the next. Property investors need to keep this in mind when considering tax implications.

For income tax purposes, it is the date of purchase or sale that triggers capital gains or losses in an investor’s tax return. But for rental income and expenses it is date of settlement that is decisive.

In purchasing an investment property you cannot claim any income or expenses in a tax return until the date of settlement. So if you buy a property in June and settles in September, there can only be taxation claims in the latter financial year.

However, if you sell a property in June and settle in September, then you would be liable for any capital gains tax in the sale year, but still be able to declare rental income expenses incurred up to the date of settlement in the following financial year.

The message is to reflect on the timing of purchase, selling and settlement when considering the tax implications of property investment.

Cheers


AKA Nicholas Gruen  

The information in this newsletter has been compiled for Peach Home Loans by Henry Ohana CPA, Accountant and Business Adviser. He can be contacted on (03) 9578 3255 or 0417 328 541, Or to e-mail him. This information is of a general nature only and clients should seek individual advice applicable to their own circumstances. Henry is happy to provide any Peach client with a free 15 minute consultation should they wish to contact him at the above phone numbers.