Jim’s Tips on Buying a Rental Property

Many people consider rental property as a very solid form of investment and a smart way to create wealth but it doesn’t suit everybody; so be sure to get independent advice on buying a rental property. If you have a stable income and are paying a significant amount in taxes, then property investment is probably right for you.  Notwithstanding,  buying a rental property can be a daunting process. Phil and Sara have owned an investment property for some years. So let’s find out what they’ve learned about their own investment.  Single-family homes can be a great investment, but before committing to that direction, make sure you have a look at the benefits of investing in “Off-The-Plan” high density property investment. You may find higher returns are available.  We created a simple infographic to describe the investment method here:

CASE STUDY: Sarah & Phil

Phil: The first thing we’ve learned is to keep good records. We keep track of all our income and expenses and it just makes everything easier come tax time. We hand it to the tax agent, and he’s always saying how well-organized we are.

Sarah: And you should definitely keep a copy of the purchase and sale contract for the property so that when you sell it, you can work out if you’ve made a profit or a loss.

Phil: And another thing to remember is you’ll need to keep a depreciation schedule and a capital work schedule if you want to claim deductions for these costs.

Interviewer: Right, and what are those?

Phil: The depreciation schedule is a record of the assets in the house and the amount you can claim each year. The capital work schedule is a record of the construction costs and the amount you can claim each year, usually 2.5%.

Interviewer: So, where do I get those amounts from?

Phil: Well, you can get the information from the seller or you can pay a qualified valuer such as a quantity surveyor to do the valuation for you. For depreciation, you can also work it out yourself but you might have to show how you got the values.

Interviewer: There are other events that may occur while owning your property, such as painting the house or renovating the bathroom. Be sure to keep all those records. You’ll need to keep all records for a minimum of five years and some for at least five years after the sale of your property.

Interviewer: Let’s talk about ownership. Phil and Sarah, you own the investment property equally, and so and you’ll need to split your income and expenses equally. Now, Sarah, you did some homework on this.

Sarah: Well, I earn more than Phil and most of the expenses come out of my wage. So, I wanted to know if I could claim more rental loss to save more tax.

Interviewer: So you spoke to the ATO, what did they say?

Sarah: As it turns out, if you own your property equally, then the net rental loss must be shared equally. Half and half.

Interviewer: OK. Now, let’s talk about some of the costs that you can and cannot claim when buying property.

Phil: Well, we are able to claim some of the mortgage setup costs when we took out the loan, and if the total mortgage setup cost are more than $100.00, the deduction is generally spread over five years.

Sarah: And there were other costs that we couldn’t claim, like phone calls and travel costs to inspect the property and things like attending seminars about helping us find a rental property to invest in.

Phil: We also couldn’t claim the purchase price, legal fees, or stamp duty on the transfer but these costs reduce any capital gains tax on the sale of the property.

Interviewer: As Phil and Sara have found out, keeping good records is critically important when buying a rental property. For example, the capital work schedule will help you claim building deductions and also to work out your profit when you sell your property. And your other records will support your claim for a range of deductions such as interest, repairs and maintenance and depreciation.

Already have a rental property? Learn more about rental property and tax in Australia here…