O'meara Property

It’s being reported that the Australian Tax Office will target over 100,000 landlords this year for audits so it is more important than ever to ensure that your records are complete and that the income you declare is correct and that your deductions are all relevant.

Whilst taxation falls into an area where you should get the advice of a qualified accountant or tax agent, here are a few things to get you started;

Rental income

You must of course declare all rental income received or credited to you; this includes rent on holiday homes. Whilst there is nothing preventing you from leasing your property to family or friends, you must charge a commerical rate of rent (ie. market rent) or your deductions could potentially be reduced or refused.

What’s tax deductable

You can claim as a tax deduction expenses you incur in deriving your rental income. There must be a  relevant connection between the rent you receive and your rental deductions. The following types of expenses you’re likely to incur normally have that relevant connection.

• Advertising costs to find a suitable tenant
• Agent’s commission to collect the rent on your behalf
• Capital works deductions (or building write-off deductions)
• Depreciation of approved items that you can write off
• Insurance on buildings that you lease
• Interest on borrowings to purchase an investment property
• Rates and land taxes
• Repairs to your investment property
• Security costs
• Travel costs to inspect your investment property
• Water and sewerage charges

Common traps to avoid

Australia’s tax system operates on a self-assessment basis, and the Australian Taxation Office will generally accept that what you disclose in your tax return is true and correct. However, the Tax Office conducts routine tax audits and has excellent data-matching programs to highlight people where a ‘closer look’ may be warranted. So it’s important that you comply with Australia’s complex tax laws. Stiff financial and criminal penalties may apply if you get it wrong or deliberately cheat the system.

Rental income

• Not declaring all the rental income you receive, and more particularly not declaring rental income on holiday homes you lease during the financial year

Tax deductions

• Overstating your rental expenses and claiming tax deductions for investment properties that are not genuinely available for rent
• Claiming a tax deduction for expenses relating to the private use of a property such as a holiday home and your main residence
• Incorrectly depreciating items that are not tax deductible
• Incorrectly claiming borrowing costs. These expenses are deductible over the period of the loan or five years
• Incorrectly claiming interest deductions in respect to loans that are partly investment-related and partly private. For example, you might lease the granny flat out and live in the rest of the home.
• Incorrectly claiming capital work deductions that exceed the construction expenditure
• Claiming initial repairs as repairs and maintenance costs rather than including these costs as part of the property’s cost base. Initial repairs are repairs you make to a newly acquired investment property (for example, if you paint a property you recently purchased before leasing it)

Capital gains tax

• Not declaring capital gains you make on sale of investment properties, holiday homes and vacant land you own
• Incorrectly calculating the amount of capital gain or capital loss you make on sale
• Incorrectly claiming a main residence exemption that’s not your fair dinkum place of residence

The advantage of a ‘Property Manager’

By appointing a property manager and having them handle all income and expenses you end the financial year with a detailed report which allows your accountant or tax agent to easily assess your overall position and not risk missing anything. They can quite literally sit there with the financial year statement in one hand and your mortgage statement in the other and complete a thorough examination of your property tax situation in no time at all.

Disclaimer

Readers must bear in mind that the information printed above is general in nature. This information is in no way designed or intended to replace the advice of a qualified accountant or tax agent.

It is often said that spending a lot of money on a garden can over capitalise a home and that money is better spent indoors than out. Is this the case?

It is true that many home owners get carried away with garden fever and don’t ask themselves if the money spent on landscaping will be realised down the track when they come to sell. The amount allocated to landscape design and planting must be  in proportion to the overall value of the home or it can easily add cost that doesn’t  add enough re-sale  value. Home owners need to be aware of the percentage cost of the overall value of the home that landscaping represents; obviously there is a big difference in the amount that should be allocated to landscaping in a house worth $300,000 and a house worth $3,000,000!  

Astute home owners soon work out that a drab and unimaginative garden will detract from the value of a home because it will not give buyers the feeling they want to live there. Even buyers who don’t think they care about gardens and gardening are attracted to the overall picture of a property where house and garden complement each other so that the whole is more harmonious. 

Driving around any town or city, it’s not hard to come across square front gardens with rectangular lawns, borders and straight driveways leading to a garage. Naturally the houses wrapped by such gardens look equally ordinary and uninteresting. Unimaginative landscaping such as this still costs money but rarely adds that ‘wow’ factor when buyers start coming through.

What is often lacking in such gardens is a sense of mystery – one of the main elements of good design that makes even a small garden more appealing to buyers. It’s not a good idea to design the garden yourself – unless you have appropriate skills. A keen gardener with a green thumb is not the same as someone who understands how to use plants in an architectural way to design and furnish a space with a sense of harmony and mystery.

If you are already lucky enough to  have a beautifully designed garden, the thing to remember  when presenting it for sale, is to make it look as if it requires no effort. Paradoxically, this effect is often achieved with a considerable amount of effort. Unkempt and weed-filled gardens draw attention to how much work may be involved in looking after them and therefore look the opposite of low maintenance. After all, if a garden is too hard for the current owner to present well at an important time like when it is being marketed then buyers will concentrate on how much work  is involved and perhaps move on to a property that looks easy just because the work has already been done and the seams are not showing.

If you are selling your home, consider this question: would you be better off with an extra $500 added to your ultimate sale price or having the sale settled 2 weeks earlier?

If you answered that you would prefer the money it is likely that you have just lost money.

While for some people it may work out well to stay in their homes longer, it is important to understand what holding out for more means in dollar terms to most people. 

‘Time is money’ is a cliche that in this instance is likely to be true. In financial jargon, this concept is called ‘opportunity cost’. It refers to the amount you have lost by not having the money for a certain period of time

Ask yourself what you would be doing with the money if you already had it in your hand. For example if you sell for $500,000 you could be earning 7% interest in the bank – that is $675 a week

Or you could put the money against your mortgage at say 9% and you would be saving yourself $865 a week. 

There are two ways you may be likely to have your settlement delayed. One is when a buyer asks for an extended settlement, the other is when the seller holds out for a high price that may or may not happen.

In the first settlement delay scenario, a buyer making an offer may work with whatever time component you have stipulated in your contract or they may ask for a delay in settlement. The offer itself may seem OK, but as you can see from the above figures, if you could be doing something else with the money, then their long settlement needs to be balanced by a higher offer. 

The second delay scenario is usually caused by the seller holding out for an arbitrary price  that is based not on market research but on ‘we need to get $x in order to buy what we want’. If the market is turning and prices are dropping then such a seller could end up getting a lower price by holding out too long, and this too must be added to the ‘opportunity cost’.

Bridging finance expands the cost of waiting even more as short term bridging finance is one of the most expensive home loan packages.

It is so easy for people to get tunnell vision when it comes to understanding that ‘more’ in price terms is not necessarily ‘better’ in net financial  status. Time and pricing factors need to be taken into account when assessing financial strategy to maximise financial outcomes.

While the market is generally good for rental property owners at the moment, it is easy for (usually novice) investors to think the sky is the limit when tenants are competing over properties and rents are still increasing. But the rules of successful property management still hold true.

Most experienced investors understand that even a few weeks’ annual vacancy usually means a lower net income than if the property had been rented at 95 percent of market value for the whole year. So if maximising income from rental property investment comes from keeping their properties occupied, why do some landlords expect to rent their properties for 110% of market value?

The answer to this question no doubt varies but such landlords sacrifice weeks of rent and create dissatisfied tenants who move on when they find a better value option, thereby creating a cycle of higher turnover and greater vacancy.

Furthermore, investors whose properties are good value get more enquiry and can afford to be more selective when deciding who will rent their property. Being selective means checking references (these days references are even available for pets!) but beware of taking into account irrelevant criteria such as dress style, marital arrangements and other personal choice issues. The bottom line criterion is Does their history indicate that they would be able to pay $x per week for y weeks?

If a property stays empty because the rent is too high, owners can get desperate enough to overlook a tenant’s patchy references; in the effort to get the highest income, they make themselves more likely to get less because poor references could mean greater likelihood of getting behind with the rent.

New investors can avoid a lot of common errors by making use of the expertise of their managing agent. Many novice investors don’t think of asking their managing agent’s advice until something goes wrong. Investors who do their homework and tell their agent up front what their needs are find it much easier to keep abreast of what’s happening and avoid confusion.

Most experienced investors ask their agent to provide a monthly statement of all income and expenses with cheques banked directly into the owner’s account. Most also ask for an annual written report of state of repair (internal and external) and cleanliness as well as a mid-year written kerbside report of state of repair and cleanliness. They should also receive a six-monthly written report of the current rental value and the local area vacancy rate and an annual written report of the current reasonable selling price of the property. Owners should carry out an internal inspection of the property themselves once every two years so that they can visualise its state of wear and tear when maintenance and repairs are discussed.

Most investors say it takes three to six months to get to know a managing agent and their way of working. Until then it is best to require all expense items to be referred to the owner (other than emergencies) prior to the agent spending any money. After the initial period, set a limit on the amount the agent can spend (usually about the equivalent of one week’s rent) without reference to the owner.

Naturally, as with any contractual arrangement, investors should always have their agreement with their agent evidenced in writing.

Knowing how to tell whether the market is starting to change  – whether it’s trending up or down – can help purchasers determine how to go about their property search.

If the market is getting weaker, then they have more time to buy without seeing prices getting away from them. When it’s getting stronger, many wish they had tried to make up their minds sooner to avoid missing out or paying more. So what are the signs of a market on the move?
 

Trending Up:

If the market is trending up (i.e prices are likely to rise), watch for:

• Properties that have been on the market for a long time are selling.
• Increased attendance at Open Houses.
• Increased bidding at Auctions.
• When you ring an agent about a property, you find they are already sold or if you ring back to make an offer you find that someone else has got there first.
• Even really challenged properties are selling.
• Sales at auction go above the reserve set by the vendors.
• Gazumping is occurring.

Trending Down:

Conversely, purchasers can take their time if the following signs of a market slowdown leading to lower prices are occurring. Watch for:

• Little interest at Open Houses
• Many of the properties for sale have been on the market for a long time
• Auctions have no buzz and bidding seems to proceed very slowly
• Auction prices falling below reserves set by vendors
• More properties passed in at Auction
• Properties selling before Auction

Most tenancy agreements state that the owner of the rental property is obliged to conduct ‘urgent repairs’ as they arise. What constitutes an ‘urgent’ repair and what happens when landlords try to ‘save money’ by refusing to carry it out?

Throughout Australia and New Zealand, landlords as well as tenants are subject to residential tenancy legislation. For example, in NSW landlords have to keep the property in good condition, they are obligated to lodge the bond with the Rental Bond Board, and there is a limit to the amount of bond that can be charged.

Urgent problems are usually defined as those that radically reduce the tenant’s ability to live in a property, such as a dangerous electrical fault, or serious infestation leading to large-scale structural damage.

A rental property owner who does not see to urgent repairs is asking to pay more for repairs in the long run as tenants have the right to hire qualified trades people to carry out urgent work and send the bill to the owner of the property. It is unlikely that a tenant will shop around for the best price, since ultimately the cost is legally payable by the owner.

Always remember to check with an experienced local property manager to make sure you are complying with all governing legislation and regulations.

There are obviously risks and disadvantages for purchasers buying off the plan, but most of these can be minimised by doing some research while some can even be turned to the purchaser’s advantage.

Developers often offer units or townhouse for sale before they are completed because it reduces their risk and makes it easier for them to raise any necessary finance; not only do they know the properties are sold, but the price is already set in concrete and lenders can feel confident.

One of the main concerns for buyers is that the property market may fall between exchange of contracts and taking possession, but of course the converse is also true: it could, in fact, rise. This is where the research is important – it would make sense to buy off the plan in a rising market, when the property could be secured at a price lower than the value upon taking possession, and less sense to buy off the plan when the market is undergoing a downturn.

Other disadvantages include the possibility of the developer going into liquidation before the project is complete or the potential for the quality of the finished product to be inferior to that utilised in the display. Purchasers should ask for the addresses of other buildings – completed or in progress – which the developer can lay claim to, and where possible talk to owners of individual properties. It is also possible to assess a developer’s reputation with a few well-placed phone calls.

No matter how good the reputation, make sure the contract includes a reasonable completion date. Some delay between the purchaser’s deposit payment and taking possession is normal and may suit some people as it means they have time to sell an existing property or shop around for a loan, but anything longer than twelve to eighteen months increases the risks posed by market forces or the developer’s liquidity.

Some buyers do very well out of buying off the plan and intending buyers can minimise risk by doing their homework properly and by making sure the contract is reviewed by their legal adviser.

Research shows that about 40% of day to day energy use comes from heating and cooling the space we live in. In these days of climate change awareness, passive solar building design is not just a do-good feel-good gimmick – it means measurable day-to-day cost-saving which will also be reflected in higher sales prices when the property is eventually sold.

Many home owners realise that by the time they sell (homes sell on average every seven to ten years), energy-savvy design will be even more highly sought after as energy prices come to match environmental impact concerns.

Read on to find out what’s involved in incorporating passive solar design into your building or renovation project.

Passive solar design – in its simplest form – means keeping the heat of the sun out of the home in summer and attracting the sun inside in winter. Most passive solar features cost little or nothing if incorporated at the design stage so if you’re building or renovating a home, it’s worth talking to whoever is designing your home.
The following points will help you ask the right questions and get the energy efficient outcomes you are looking for.

1. Orientation
Orientation comes down to intelligent use of the sun. It doesn’t cost anything but the decision about which way the home will face must be made before the foundations are laid. Choose the ideal direction to maximise sun use during winter and restrict sun use at the hottest times of year (in the Southern hemisphere this means a north orientation for day use areas and south for night use).

2. Zoning
Clever zoning means placing the daytime areas of the home towards the northern side and the night time areas to the south or east (it’s easy to stay warm in bed and days are spent in the living areas.)

3. Glazing
Well-placed and well-sized windows reduce the need for artificial lighting during the day. At the same time, the fact that glass is a poor insulator needs to be taken into account; double glazing or some other form of insulation such as heavy curtains may be necessary at night time or on sunless winter days in most climates. Unprotected single-glazed windows lose ten times more heat in winter than the same area of insulated wall. Windows can also be designed to let sun shine on interior walls and floors that can be built of materials that have the thermal mass to store it.

4. Insulation
No matter what the climate, insulation for walls, roofs and floors is crucial in energy-efficient design, keeping heat inside the house during winter and outside in summer. In some cases the building material itself may be the insulator (e.g mud bricks, double brick).

Most home sellers probably know someone who has ‘staged’ their property for sale even if they haven’t done it themselves. Making the home look good in order to sell it is becoming more common and is certainly a way of getting more sales dollars, especially when an empty house is furnished and decorated to have the wow factor and camouflage unattractive areas. But some people overdo it, thinking that any staging (even bad) is better than no staging at all. When does staging go too far?

Most experienced agents will tell you that anything overly contrived and unreal is unlikely to convince purchasers to believe in (let alone identify with) a lifestyle and is therefore unlikely to make them feel like making an offer.

Many home sellers like to display pictures of super attractive people such as models or celebrities in their house as opposed to the “normal-looking” people who actually live there. This might seem like a good subliminal selling trick suggesting the upmarket, perfect lifestyle the current owners have and by association, the upmarket, perfect lifestyle buyers will live if they buy the house. The problem is, most buyers spot the trick and are put off by it. A better idea would be to hire some ‘good’ paintings to use in the staging of your home rather than pretending to be a cast member from “Sex and the City’ or The Bold and the Beautiful”.

The smell of fresh coffee might be convincing but putting flower petals in the master bathtub or tinting the water to match the décor is another overly contrived gimmick. Buyers know you don’t actually live this way and instantly feel they are being set up.

A well-staged home shouldn’t look obvious or contrived – it should look effortless and stylish as if efficient but busy people with good taste happen to live in the home.