Tax Question

[Johnandshellz]

Please excuse my ignorance but was helping for help with the following:

I buy an Investment property worth $165,000 which gets $285PW thus making it close to a 9% yield and cash flow positive.

Fixed costs associated will be:
Rates 1500 year
Insurance 1200 year
Accountant Fees 1000 year

My question is
1/ Will I pay tax on any income over and above costs? e.g if there's a 1k surplus after maintenance and other cost's will I get taxed on this, guessing so?
2/ Would I be likely to get tax back at end of year or be paying a small amount?

Many thanks for any help.

[Bob Kane]

You forgot to include the mortgage interest costs.
And chattels depreciation.
And about $5000 pa average on repairs and maintenance.
Deduct all that and you pay tax/ get a refund on what's left over.
Make sense?

[Wayne]

1/ Will I pay tax on any income over and above costs? e.g if there's a 1k surplus after maintenance and other cost's will I get taxed on this, guessing so?
2/ Would I be likely to get tax back at end of year or be paying a small amount?

1/ yes - you made a profit so get taxed on that profit. If you take all expenses into account (as per Bob's comment)
2/ depends on how you are structured if there is a loss.

You would need to work out all the costs to really know.

[Johnandshellz]

Yeah sorry forgot to put in Mortgage costs but am aware of associated costs. From what I have worked out would have approx 1k surplus at end of year.

1/ yes - you made a profit so get taxed on that profit. If you take all expenses into account (as per Bob's comment)
2/ depends on how you are structured if there is a loss.

You would need to work out all the costs to really know.

[Wayne]

Yeah sorry forgot to put in Mortgage costs but am aware of associated costs. From what I have worked out would have approx 1k surplus at end of year.

then that is income and you or the company should pay tax.

[Rosco]

Income:
Rent - 50 weeks at $300 per week						14250
		As a % of total house			8.64%
Less Expenses:
Accounting					1200
Bank fees					50
Body Corporate					0
Insurance					1200
Interest - at 5.75%					9,488
Property Management at 7.5% plus GST					1,229
Rates					1500
Repairs and Maintenance					1000
Seminars
Subscriptions
Travel
Total Expenses						15666.56
NET CASH SURPLUS (DEFICIT)						-1416.56

[Rosco]

Above is quick mock up of income and expenses. This shows small loss. Plus is before depreciation (but as you have a lower level property might be little or no chattels) and any travel, seminars, subscriptions.

But if as you have put you have a small profit, then it depends on the owner as to what tax is paid.

- your personal name, then $1,000 taxed at your marginal tax rate
- 50/50 Partnership, then $500 taxed in each individual tax return, at their marginal tax rate
- Company (not LTC), taxed at 28%
- Trust could distribute income to beneficairies or pay tax at 33%
- LTC, profit is allocated to shareholders, and shareholders pay tax on profit.

Ross

[Ghastkill]

Above is quick mock up of income and expenses. This shows small loss. Plus is before depreciation (but as you have a lower level property might be little or no chattels) and any travel, seminars, subscriptions.

But if as you have put you have a small profit, then it depends on the owner as to what tax is paid.

- your personal name, then $1,000 taxed at your marginal tax rate
- 50/50 Partnership, then $500 taxed in each individual tax return, at their marginal tax rate
- Company (not LTC), taxed at 28%
- Trust could distribute income to beneficairies or pay tax at 33%
- LTC, profit is allocated to shareholders, and shareholders pay tax on profit.

Ross

A question related to LTC.. Is there much benefits of setting up an LTC with just one person? Can I easily add my partner into the shareholding?
pthanks

[Rosco]

The benefit of an LTC is flexibility. So this means you can move shareholding around a bit (watch catches with deemed sale and possibly tax avoidance), without actually incurring the legal fees of selling the properties into a new entity.

An LTC also costs more to administer. $45 at least per year to complete company annual return, plus around $500 extra accounting for a Company(includes LTC) or Trust, compared to an individual or partnership.

Ross

[brend]

For the rental accountants,

Could you please advise if the IRD has an interpretation statement regarding how many rental properties you would need to be in 'business' i.e so you could claim home office etc.

I saw the case regarding WFFTC where 5 rentals = business

Struggling to find something solid.

Thanks

[spaceman]

^ How many????....LOLZ .....I'll bet you won't ever get an answer.

What if you had one property???......what if the income from that property was $1,000,000 per year??

I think you'll find that as soon as you start deriving income from rental properties you are in business.......and all expenses incurred in deriving that income are deductible....including home office etc

Cheers
Spaceman

[Wayne]

but claiming for a home office with one rental when the PM does the work can seem a bit much. You need to be able to defend any position you take.

[Rosco]

You need to be realistic with home office.

- Generally for 1-2 rentals, especially with property managers, then very little office space is needed or used
- As you get more properties, then you start to use an office more and a claim becomes more justifable

If you have an office, that is solely used for the rental business (ie not used for your salary job, doesn't have a bed or other furniture in it, not used for games or by kids, and not used for personal use) then you would be able to claim this portion of your household expenses such as interest, rates, insurance etc. % claim is normally based on size, so if the office is 10 square metres, and total house is 100, then you would claim 10%.

Ross

[brend]

Rosco, as a property accountant do you recommend property investors holding 1 property (no PM) to claim a home office?

[spaceman]

^LOLZ!!!!!!!!

Cheers
Spaceman