Whenever the real estate sector turns into a seller's market, many opportunities arise. In particular, there is increased demand for rental properties, and this can present a business idea for those who would like to offer solutions and management services. So if you see this as a chance to grow your revenues, what do you need to know about rental income and tax obligations?
Positive Versus Negative
Before you dive into this area, you need to figure out whether you want to follow a positive or negative gearing approach, as this will have a bearing on your tax situation.
If the money that you earn through rental payments is greater than the total costs incurred to service the opportunity, you have a positive cash flow. You need to pay tax on the earnings minus the amount of deductibles. Alternatively, if you find that your property costs and expenses outweigh the rental income, you may benefit in the long term due to appreciation – and will be able to maximise your tax deductions.
If you intend to take out a loan of some kind to purchase your rental properties, you can claim the associated interest and fees against your business tax returns.
Repairs or Improvements
You will be able to claim the cost of repairs right away but not any improvements. This can be a grey area, and you cannot claim something as a repair if it is also an improvement. Here, you will need to claim depreciation against the improvement over a number of years instead.
Depreciation can be a complicated subject, and if you have a portfolio of properties, you will certainly need to bring in a quantity surveyor. They can draw up a depreciation schedule, and this will summarise the deductions that you can take going forward. Improvements are included here as well. If you need to fit a new kitchen to an acquired property before it is suitable for rental, depreciate the costs against your tax burden.
Other deductions can also be included. For example, you will want to advertise for new tenants. You may also include some legal fees as you set up your contracts or claim management costs if you use a third party to do this. If your properties are part of a commonly owned area (aka a strata title), then you can claim the corporate fees alongside any utility bills.
Just remember. If you happen to use one of the properties for your own personal use (for a beachside holiday or similar), then you need to apportion your expenses instead. You cannot claim utility bills and other expenses if you are occupying the property yourself or allowing others to stay without paying rent.
If you have any questions or confusion, make sure that you talk with your business accountant. They will set everything up so that you can enjoy the benefits of your commercial venture without any worry.