Seasoned property investors know that this time of year presents a golden opportunity.
While everyone else may dread tax time, savvy investors know they have a chance to expand their property portfolio, or at least maximise its efficiency. The right or wrong decisions can mean thousands of dollars in difference right now, the effects of which can compound even further in future years.
So, what is best practice at the end of the financial year?
Go back in time
First things first, let’s take it back to this time last year. Tax should not be a thing you panic about last minute.
Rather, you should spend the whole financial year adopting certain practices that will benefit you the following July.
You can start by making sure you are always aware of the deductions you can make.
How much have you spent on property managers? On repairs and maintenance? On strata levies, water rates, landlord insurance, and investment loan fees? The list goes on and on.
Rather than trying to search your emails or rack your brain each June to remember what you spent money on, keep an email folder, or better yet a spreadsheet and diligently update it in real-time throughout the year.
Nail your deductions
Make sure you know what you are entitled to deduct. Things like depreciation, for example, can be confusing. And if you don’t know what to claim, it could cost you thousands over the years.
Zinger Finance brokers have come across clients who have earned a work income of $250,000 in a financial year and ended up paying tax on $80,000 because they know what to deduct.
You can make large tax deductions without buying a negatively geared property or a new one. So it’s important to have the right strategy where your assets are helping you reduce your tax while you build a larger portfolio.
Engage a pro
The flipside of claiming all the deductions possible is that your reduced taxable income can actually work against you if you need to try and borrow more money to buy another investment property down the track. This is just one of many reasons that you need to get the right team of professionals working for you. The best place to start is with an accountant who understands your plans, goals and strategy.
Say you want to build a 10-property portfolio for example. An accountant who knows this might give you different advice or structure your tax in a different way than one who thought you were happy to leave it at one investment property.
It takes a very good accountant to be able to maximise your deductions and your borrowing capacity so that you can continue to purchase assets while getting decent tax returns.
Many happy returns
B Invested founder Nathan Birch recalls that when he was an employee in a salaried job (and not yet living life by his own terms), he would claim his tax return on the first possible day he could. That meant he would have extra capital in his pocket to go and purchase more assets. Back then, he was in acquisition mode for his portfolio and was always looking for the next injection of capital to direct to a new asset.
He knew what a lot of others may not realise: a good tax return can actually equal your next investment deposit, or at least go a long way towards one. When you think about inflation, the hard truth is that every day, cash is worth less than it was the day before. So, while the amount of money you will get from your tax return might not change as you wait to access it, its value certainly will.
The sooner you access it and direct it into a growth asset, the more you are maximising your tax return.
