Some people can be caught up in their investments by neglecting the tax consequences, including capital gains taxes.
Whether you’ve recently invested in your first property or already have a booming real estate portfolio, you should be well aware of all the tax deductions you may be entitled to.
With each fiscal year, it’s crucial to carefully monitor what you can claim and where you can maximize your tax spending. Here are several ways to minimize your taxes on your investment property:
1. Keep your expense reports organized and up to date
One way to get tax relief on your investment property is through tax deductions. You can do this by meticulously tracking all of your receipts and bank statements.
Make sure you keep the following records:
- The date and price of the property — these will come in handy if you are going to experience a capital gain or loss once you decide to sell.
- Any expenses for which you want to produce deductions, such as the name of the supplier, the amount of the expense, the nature of the products or services and the date of the expense
- Any rental or rent related income to include in your annual tax return
There are different ways to organize your documents, such as storing physical statements in a ring binder, filing them manually in a folder on your computer, or using applications to track your spending.
2. Understanding the Capital Gains Tax
A capital gain occurs if you sell a property for more than what you paid for it. However, expect a capital gains tax, which is a reduction in the profits you will make from the sale of investment property. The capital gain is part of your taxable income and is deducted at your marginal rate.
If you want to minimize your capital gains tax, here are a few things to consider:
- Reside in the property for at least two years. If you don’t live in a property for at least two years and decide to sell it, the gains may be taxable. If you sell a property in less than a year, you will be spending more taxes as it may be subject to short-term capital gains tax.
- Keep all receipts for home improvement projects. The base price of your property includes its purchase price, as well as any improvements made over the years. If the cost base is higher, you will likely get lower capital gains tax. Factors that can reduce your capital gains tax include additions, renovations, landscaping, air conditioning installation, new windows, fences or driveways.
If you want to learn more about capital gains taxes, consulting a trusted source for more information will surely be helpful in getting the most out of your investment properties.
3. Know the difference between downtime, maintenance and repairs
It is crucial to remember that there are specific classifications for maintenance, repairs and capital work.
When you complete your income tax return, you must classify these expenses correctly to ensure the recording of deductions if you want to reduce your tax on your investment property.
- A repair involves the replacement of items worn, damaged or broken by your tenants.
- Maintenance consists of preventing or repairing a deteriorating item after the rental of your investment property.
- Examples of capital work include replacing an entire structure with partial damage, such as a fence, or adding a new item to your property, such as a driveway.
4. Prepaid expenses
If your taxable income is close to the income tax threshold, it may be best to consider prepaying expenses on your investment property.
You can prepay a minimum of 12 months interest on your fixed rate loan. This will allow you to claim it later as a deduction on your annual tax return.
Interest on loans to finance repairs, renovations, or the replacement of depreciated items, like the hot water system, can also be claimed as a tax deduction if you rent out your property. If you haven’t rented it out, you can only claim when it was rented.
5. Claim fixed assets and borrowing expenses
You have the option of maximizing the deduction on your taxes by claiming capital assets and borrowing costs on your investment property. Keep in mind, however, that whether you can deduct the entire expense as a rental property deduction in the same year will depend on the value of the cost.
Fixed assets or impaired assets have a finite useful life and their value decreases over time. From these assets, you can deduct the full cost over its expected life. If you have capital expenses below the 300 price range, you can claim them immediately in the year in which you acquired them.
Borrowing costs cover the costs of taking out a loan for your investment property, and you can use them to lower your taxes. Here are some examples :
- Loan establishment costs
- Payments to Mortgage Brokers
- Mortgage loan insurance
- Securities search fees
- Stamp duty levied on the mortgage
- Mortgage document preparation and filing fees
- Fees for an appraisal required to approve a loan
If these expenses fall below the 100 price range, you can claim the full amount in the same year. Otherwise, you can spread the deduction over five years or over the term of your loan.
If you want to get off to a good start in real estate investing, knowing the tax consequences and learning how to lower your taxes is essential.
As a real estate investor, strive to capitalize on the tax advantages you will receive. In the long run, deductions from your investment property taxes can help save you money while helping you gradually acquire more properties to improve your real estate portfolio.