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If you have recently purchased an investment property, or if you are looking to buy one, it is important that you understand the tax obligations attached to this. One of the important elements that you need to be aware of is which deductions that you can claim.
The more deductions you can find, the less you are going to have to pay overall, which is going to be a massive help to the majority of investors. In this article, we are going to be taking a look at how investment properties can impact your tax return, focusing specifically on tax deductions.
It’s important to get all of your tax deductions in order before you need to file the return. There is no reason for you to pay more tax than necessary, which is where the deductions come in.
The first tax deduction that you can make is for repairs. If repairs are made at the property during the period that it is leased, they are deductible. However, any initial repairs that were carried out in the first 12 months of owning the property, are not generally used as a tax deductible. These repairs can be used to reduce a capital gain on disposal though, so that is worth looking into.
You may also be able to claim deductions for improvements. Be careful here though, as the improvements that you make to the property are not deductible in full. To figure out the cost, they have to be depreciated and then claimed over their effective life. But, it is an option and one that you should strongly consider to bring your tax return down, even if just a little.
There are also a whole range of other expenses that you can use as tax deductibles, but they don’t necessarily fit into a specific category that we can write about. But, you do need to have the information available to you, which is why you will now find a list of other expenses you can claim as a tax deduction.
The list above shows you a lot of the other expenses that you can claim on when filing your tax return. However, this is not an entirely inclusive list, meaning that there are others that you can claim on as well. If you can think of anything else, or your partner can but it isn’t on the list, that doesn’t mean you can’t claim.
It’s generally true that a family will purchase a rental property in the name of the person who earns the most. However, this is rapidly changing, and a lot of families are choosing to go in a different direction. Many families that have two income earners are choosing to own the property in equal shares. Or, you may be wishing to purchase this property with a friend instead.
If you have different incomes, the majority of the time you are going to be in two completely different financial situations. This works out well for both of you as you can use the strength of each person’s financial position in your favour. An example of this would be if one owner has enough money for the initial deposit, but the other has a more solid and stable income, ensuring that they can afford the repayments when they are due.
When the property is sold later down the line, the capital gain is split between the owners. It’s also important to know that during the period of ownership, half of the rental losses will go to each of the owners.
You should be looking at tax in two different ways. The year on year tax savings are one way to look at this. The year on year tax may only be slightly reduced by having co ownership of the property. However, the overall tax over time will be cheaper than if one person was responsible for owning the property. This shows that having joint owners of a property mitigates the tax risk of owning a property in general. As such, you may want to start looking into financial planning now to get into a position where this is a possibility for you later down the line.
The process for buying an investment property with another person is slightly different. The bank that you are looking to borrow money from will assess your loan slightly differently due to the slightly different ownership structure. However, it is important to note that you will still need to provide the bank with the standard information and documentation that you would normally be expected to. You will both be expected to submit paperwork to get a mortgage to buy an investment property the same way you would if you are purchasing alone.
One of the criteria that banks are going to look for is one person having a high income in order to make up for the smaller income of the other person. This is because the joint owner with the higher income will be able to afford the repayments should the other not be able to pay them.
It is also true that credit scoring will be slightly more favourable for joint owners than it would be for a single applicant. This is because there is less chance of the payments being missed if there is more than one person responsible for them.
When being assessed by the bank, you should expect that the asset position of each borrower to be assessed slightly differently. This will, of course, depend on the lender that you apply to, so you may find the process differs between lenders.
You should understand that if one person has a good credit history, this does not automatically make up for the other having a poor credit history. Banks need to know that the money borrowed will be paid back, and if the credit history of one applicant is poor, this could be a problem. However, some lenders will not require proof of income in order to prove that you can afford the debt you are taking on for the property investment.
It is not true to say that because you are co owners on an investment property with someone else, that you cannot then buy other property on your own. But, that doesn’t mean that it is going to be the easiest thing to do, because banks will assume the worst in order to protect themselves and their legal interest. For example, you may have a rental property in which you receive market rent for, but perhaps now you are looking to buy a holiday home for yourself. You aren’t going to want to purchase this with your friend, so the only option is to look at purchasing the next property on your own.
If you already have a loan, then the bank is going to look at the previous loan to determine whether they think you will be able to afford to take on more. Borrowing expenses are expensive on their own, but when you add more onto this, another property nonetheless, things can start to get very tricky.
If your repayments with your co owner is $4,000 per month, and the rental income was $2,000 per month, then you would assume the bank would use half of these figures in their assessment. This is not the way they will work it out though.
We mentioned above that banks are going to assume the worst, and this means that they will assess your loan as if you are making the full $4,000 in loan repayments. Only half of the rental income will be counted as relevant as well. This will lower your chances of being accepted for a second loan due to all of the other expenses that you are going to need to face such as property expenses, legal expenses, stamp duty, and so much more on top of your loan.
The good news here though, is that not all banks have this policy. Some lenders will consider how much you are actually paying of your current repayments, rather than assuming you pay the entire thing. As such, you are more likely to be approved as your total income won’t be as impacted by the huge deduction, and the rent received will further help you.
Rent is one of the ways that you can claim deductions for income tax purposes. When filling out your tax returns, make sure that you are claiming for all income and expenses that you can.
The income that you will receive from rent is taxable to the owners of the property. This must be in the same proportion as the ownership interest that is shown on the title. When renting the property out, you must do so at the standard market rate in order to be able to claim all of the expenses in full. If you do not do this, then you will only be able to claim deductions up to the amount that you are charging in rent.
You must declare the rent that you have received in the year that you received it to remain on the right side of the law.
Something that you might not know is that if you used the entire amount of money that you borrowed to purchase the property, you will be able to make interest claims. The interest that you are paying on the loan that you used to purchase the property is deductible if this is the case, which should be stated on your tax return.
If the building that you are purchasing is under 25 years old, you are entitled to claim a deduction of 2.5% per year of the original cost of construction. This can be done for up to 40 years from the original date of construction, making your tax return that little bit easier to look at.
Should it be the case that you do not know the building cost, you can hire a quantity surveyor who will determine the building costs for you. This expert will start working on depreciation schedules for the property, meaning that you can claim depreciation. They will also work on finding out how much can be claimed for you based on the information available to them from the survey that they will have conducted.
In other words, you will be able to claim money off of your tax, simply because the house or property was built less than 25 years ago.
Later down the line, you and your co owner are likely going to want to sell the property, unless the rental agreement you have in place is working out well. If you do want to sell, then you will be able to claim back on capital gains tax. If you are an individual rather than a company, the rate paid is going to be the same as your income tax rate for that year. Ensure that you look into capital gains tax and pay what you owe, while also making sure that you don’t miss out on any breaks that you are entitled to.
We hope that you have found this article educational and informative, leaving with a better understanding of the investment property tax deductions that come with joint ownership of a property. You should be secure in your knowledge of how this is going to impact your tax for each financial year. If you do require more information about anything to do with this type of tax and the deductions that you are eligible for, get in touch with BMT Tax Depreciation today. Expert advice is waiting for you.
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