Tax Expert Explains Why Property Owners Claim On Borrowing Expenses
While some rental property expenses can be claimed straightaway, there are a number of expenses which are only deductible over a number of years. Property Acquisitionand Tax expert at TLK Partners, Matthew Mousa, eases the way through a minefield of these sorts of tax claims. The tax laws regarding rental property have changed recently, and it’s important that investment property owners get to understand the new regulations.
Borrowing Expenses are one of the three different types of expenses that the tax man expects homeowners to deduct over an extended period of time. The others are the Depreciation of Assets and Capital Works Expenses.
There are certain unavoidable expenses that buyers will have to pay when they borrow money to purchase an investment property for extra rental income, and the list is quite long, as Matthew explains.
“To start with, you will have to pay the institution that lends you the money for establishing the loan, and you will also have to pay a fee to the mortgage broker. You’ll also be charged for the lender searching for the title deed. Then the lender will send a building inspector to inspect the property and make a valuation. This expense will also be your responsibility.”
And there’s more: “Costs related to stamp duty for the preparation and filing of the mortgage documents will be yours to carry, and believe it or not, the lender’s mortgage insurance is also for your account.”
These are all classified as borrowing expenses that are deductible over a number of years.
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Borrowing expenses which are not deductible include: The insurance homeowners are required to take out to cover the mortgage in the event of their death, disability, or unemployment; the Interest the lender charges the borrower; and the Stamp Duty that’s charged on the transfer of the property. This is not to be confused with the stamp duty on the mortgage documents, which is deductible.
If the total borrowing expenses are less than $100, the borrower can claim the total amount in the year the loan was taken out. However, if the total borrowing expenses are more than $100, it will have to deducted over five years, or the length of the loan agreement, whichever is shorter. “This means, if your loan is repayable over three years, the deductions are calculated over three years, and not five years,” Matthew explains. “If you repay your loan earlier, you are allowed to deduct what’s left of the borrowing expenses in the year that you repaid the loan.”
If the loan was taken out during the first income year, homeowners can only claim a proportional amount of the borrowing expenses normally claimed for a full year. “If you took out the loan, say, three months into the new tax year, you would only be able to claim 75% of what you would claim the next year, and every year thereafter, until the three or five year term is completed and the loan is paid off. The same proportional calculation will be necessary in the final year.”
“All investors must keep abreast of the ever changing taxation landscape if they want to maximise their return on investment, that’s our daily occupation,” Matthew concludes.
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