Some individuals can get caught up with their investments by overlooking the tax consequences, including capital gains taxes.
Whether you recently invested in your first property or already have a booming real estate portfolio, you should be well aware of all the income tax deductions you can gain.
In every financial year, it’s crucial to meticulously monitor what you can claim and where you can maximize your spending for tax purposes. Here are several ways to minimize your taxes on your investment property:
1. Keep Your Expenses Records Organized And Updated
One way to obtain a tax break on your investment property is by way of tax deductions. You can make it happen by meticulously tracking all your receipts and bank statements.
Make sure you keep records of the following:
- Date and price of the property—these will come in handy if you’re going to incur a capital gain or loss once you decide to sell.
- All expenses you want to file deductions for, such as the supplier’s name, expense amount, nature of products or services, and date of the expense
- Any rental or rent-related income to include in your yearly tax return
There are various ways to organize your documents, such as storing physical statements in a ring binder, manually filing them in a folder on your computer, or using applications to monitor your expenses.
2. Understand Capital Gains Tax
A capital gain occurs if you sell a property at a higher price than what you paid for it. However, expect a capital gains tax, which is a cut from the profits you’ll gain from the sale of an investment property. The capital gain is part of your assessable income and levied at your marginal rate.
If you want to minimize your capital gains tax, here are a few ways to consider:
- Reside in the property for at least two years. If you fail to live in a property for at least two years and decide to sell it, the gains can be taxable. If you sell a property in less than a year, you’ll spend more on the taxes since it might be subject to the short-term capital gains tax.
- Keep all receipts from home improvement projects. The cost basis of your property includes its purchase price, along with the improvements throughout the years. If the cost basis is higher, you’re likely to get a lower capital gains tax. Factors that can cut your capital gains tax include expansions, remodels, landscaping, air conditioning installation, new windows, fences, or driveways.
If you want to know about capital gains taxes, checking a reliable source to get more information will surely come in handy in making the most out of your investment properties.
3. Know The Difference Between Capital Works, Maintenance, And Repairs
It’s crucial to remember that there are specific classifications for maintenance, repairs, and capital works.
When you’re filing your tax return, you should categorize these expenses properly to ensure the registration of the deductions if you want to lessen your tax on your investment property.
- A repair involves the replacement of worn-out, damaged, or broken elements by your tenants.
- Maintenance involves preventing or fixing an element in a deteriorating condition after renting out your investment property.
- Examples of capital works include replacing an entire structure with partial damage, such as the fencing, or adding a fresh element to your property, such as a driveway.
4. Pre-Pay Expenses
If your taxable income is near the income tax threshold, it might be best to consider pre-paying your investment property expenses.
You can pre-pay a minimum of 12 months’ interest on your fixed-rate loan. Doing so will allow you to claim it later on as a deduction in your yearly tax return.
The interest on loans to finance property repairs, renovations, or replace depreciating elements, such as the hot water system, can also be claimed as a tax deduction if you rent out your property. If you didn’t put it up for rent, you can only claim for the time when it was.
5. Claim Capital Assets And Borrowing Expenses
You have the option to maximize the deduction on your taxes by claiming the capital assets and borrowing expenses on your investment property. Remember, however, that whether you can claim the entire expense as a rental property deduction in the same year will rest on the value of the cost.
Capital assets or depreciating assets have limited life, and their value diminishes over time. Among these assets, you can claim the total cost over its expected life. If you have capital item expenses below the 300 price range, you can claim right away in the same financial year you acquired them.
The borrowing expenses cover charges associated with taking out a loan for your investment property, and you can use them to lower your taxes. Some examples include the following:
- Loan establishment fees
- Mortgage broker payments
- Lender’s mortgage insurance
- Title search expenses
- Stamp duty charged on the mortgage
- Costs for preparing and filing mortgage documents
- Fees for an evaluation necessary for a loan approval
If these expenses fall below the 100 price range, you can claim the total amount in the same year. If not, you can distribute the deduction over five years or the term of your loan.
If you want to enjoy a good start in real estate investing, being familiar with the tax consequences and learning how to reduce your taxes is essential.
As a real estate investor, make an effort to capitalize on the tax advantages you’ll gain. In the long run, the deductions on your investment property taxes can help save money while helping you steadily acquire more properties to improve your real estate portfolio.