Real Estate Tax Straight Up Questions and Answers

Resident tax expert Julia Hartman answers questions from API readers in the January 2007 magazine.

Timing the real estate renovation

Question: We are about to purchase an apartment on a first homebuyers grant and plan to live in it for the required time, and then lease it out and move into something a bit bigger. We were wondering if it would be worthwhile doing the upgrades to the real estate property while we are residing in it or rather when it becomes an investment property.

Answer: It’s probably more cost effective for you to do them while you’re living there and the tax consequences for any upgrades, as opposed to repairs, will be the same. If you replace the bathroom or kitchen most of y our expenses will only qualify for the special building write-off of 2.5 per cent a year for the next 40 years, so you’ll still benefit from that when you move out. Replacing equipment such as air conditioners, vinyl, carpets, stoves, and the hot water system is best done just before the tenant moves in, as they’re depreciated over 10 to 12 years. Initial repairs, i.e. things that needed fixing when you bought the real estate property, wouldn’t be tax deductible anyway. It’s only later repairs that are better done once the tenant has moved in but these repairs can’t improve it beyond the state it was in when you bout it.

Interestingly, the ATO states in TR97/23 that you can claim a tax deduction for real estate repairs carried out while the unit is rented, even though they became necessary while you were previously living there. For example, if the walls don’t need painting at the moment but by the time you move out they’re starting to look a bit shabby, providing you put tenants in there first you can claim the cost of a repaint of the apartment real estate property. If possible avoid buying depreciable items that cost under $300 until the real estate tenants move in as these can be completely written off in the year of purchase. Examples of these include curtains, light fittings, and fans. But all like items must be grouped together to be under the $300 limit for the year. So if you’re going to replace all the curtains, wait until the tenants are in there and then only do $300 worth per year.

Finance Confusion

Question: I own my own real estate home, have an investment loan of $200,000 and savings of $80,000. I would like your advice on how I can utilise my savings in the best possible way over the short term, as I will need access to this money in the future. I was recently advised that if I put the $80,000 onto the investment loan (and reduced the balance to $120,000), if I was to later redraw this money back out for non-investment purposes only the interest on $120,000 would not be tax deductible. However, if I was to deposit the money into a 100 per cent offset account (which is separate from the loan) I could later withdraw my savings and not affect the tax deductibility of the interest on the full $200,000, even though the total amount of interest actually charged in both scenarios is the same. Is this information correct?

Answer: Yes it is correct. Couldn’t have put it better myself.

Consequences of Payment

Question: My real estate investment property was leased to the Defence Housing Authority for nine years. The real estate lease had a contition that on the end of the lease the property would be repainted outside and inside and new carpet put in. The real estate property was painted inside but I chose cash compensation instead of outside painting and new carpet. How will this payment be treated in my tax return?

Answer: This would be assessable income.

If you have tax questions you’d like answered, please email it to: editor@apimagazine.com.au. Julia Hartman is a CPA, registered tax agent and founder of BAN TACS Accountants Pty. Ltd.