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End of year tax tips for landlords

End of year tax tips for landlords. Source: Getty

The federal government stimulus surrounding COVID-19 has effectively missed one important demographic – the humble residential landlord.  

This tax time, landlords should keep the following tax issues in mind.

Lower rental income

If your property has lost a tenant or it has a tenant that is not paying rent, your tax deductions on the property will increase overall. So, while you might be suffering with an increased cost of owning the property the government will also step in and give you a bigger tax refund when you lodge the tax return.

If you previously generated a net rental profit from owning the property you will now generate less of a profit. So you will have less taxable income to report. For most people this will mean that you pay less tax when you lodge your tax return. 

Deferred rental payments

You only pay tax on rental income when you, or your real estate agent, receive the income.  So, if you have made an arrangement with your tenant to delay the payment of the rent until they are in a better spot financially you will only pay on that income when you get the cash in your hand. 

This is also a boon for landlords as some tenants, despite the best of intentions, might not be able to pay the back rent later on.

Renovating the home

Many landlords have vacant properties due to COVID-19. And some landlords chose to renovate the property in that time or do those repairs that have been slowly neglected. 

If you intend to use the property again as a rental property after the renovation you can still claim the holding costs of the property while you are renovating it. So, the interest incurred on the home loan, shire rates and land tax are still tax deductible even if you are no longer even trying to rent the property.  

If you renovate the property, the cost of the renovation is normally capital in nature. So the renovation cost is probably tax deductible over a number of years. Sometimes the work done is minor - if your renovation is simply a minor repair you can claim that cost immediately. 

Dealing with the banks

A lot of banks have offered to change loans from principal and interest to interest only. So the cash cost of owning the home has been reduced.

From a tax perspective you do not enjoy a tax deduction for making the principal loan repayments. The cost of the interest payments however is tax deductible.  So the cash cost of owning the home is lower while the tax benefit of owning the home has stayed the same.  This has resulted in a benefit as the cash strain during COVID-19 has been lessened. 

At some time, landlords will need to repay the home loan. This might be by making loan repayments or by selling the property.  So the act of switching to interest only, while freeing up cash now, might not be a long term strategy. 

Land tax

Some states have offered land tax relief for landlords. NSW, ACT, Victoria and South Australia are offering land tax relief ranging from 25 per cent to 50 per cent. The West Australian government is offering land tax relief for commercial landlords and also offers residential tenants suffering hardship a grant of $2,000.

If you have enjoyed land tax relief you will have a lower tax deduction on the property.

The impact of COVID-19 has had a significant impact on residential landlords and thrown up a lot of challenges. And the underlying tax principals around owning a rental property remain unchanged, so, with planning, landlords should be able to take advantage of the tax opportunities on offer. 

By Ross Forrester, Director, Westcourt Family Business Accountants.

Ross is a Chartered Accountant, Chartered Tax Advisor and an Accredited Family Business Advisor.

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