Being a rental property owner can be great. Not only are you helping someone in need, but you're getting paid to do so. But while it is a good investment, it is also vital to know the tax responsibilities that come with it.

Here are the things that you need to know about taxes on rental properties.

OWNERSHIP

There are two main types of ownership: Joint Tenants and Tenants in Common.

Joint Tenants split everything exactly 50/50 between owners. If you are joint tenants with your partner, everything is split for the property 50/50. If one of you dies, the property will automatically transfer to the other owner.

Tenants in Common own the property at a set percentage and can decide how much each gets out of any purchases made while they own it together. This is common for siblings when they own property together; they can set up their ownership as Tenants in Common so that they can choose who inherits their share of the property if one dies.

The percentage ownership that each person has in the property must be reported in your tax return. We cannot change this based on the income that each of the owners earns, it is based on the names and percentages listed on the title deed.

When it comes to divorce and separation, you share a property with your ex-partner. It is wise to get the title of the property transferred as quickly as possible to reduce the amount of time you have to share tax data with each other. We often get asked, "but I pay nothing towards this property, why does it need to be in my tax return?" The answer is that if your name is still on the title of the property, then you are required to declare your share - even if it is not a monetary share.

It's important that all income and all expenses in relation to a property are declared on the tax return. Our software enables us to enter in full amounts and the split to each person comes through separately. So when preparing numbers for your tax accountant, make sure to give us the full amounts for rent and expenses for the whole year.

POSITIVE AND NEGATIVE GEARING

When it comes to property investment, there are two main ways that investors can make money: positively and negatively geared.

Positively geared properties are those properties that make you money. These properties are the ones that have deductible expenses (costs) that are less than the income (rent) you earn from the property.

Negatively geared properties are those properties that have more claims than rent coming in. For some properties, this will be a tax time negative, but a cashflow positive. Rent covers the mortgage and the costs, but not the depreciation claims, and this means that any negative on your tax return means that you will have reduced income and maybe a higher refund.

However, it is possible to have negatively geared properties from a tax point of view that are still cash positive... how does this work?

Some properties are able to claim depreciation or Special Building Writeoff for the cost of the building and some of the items bought and placed in the house (depending on when the property was built and when it was purchased). This depreciation and writeoff claim is able to be claimed against your income without being out of pocket, meaning you don't have to pay extra money to get a tax deduction.

From a tax point of view, a negatively geared property that is cash positive is the best outcome.

A property that is costing you money can be a bad investment if you are not going to make up that money from the sale price when you sell the property. There have been a lot of properties that have gone up and down in value over time, however, are still hovering around the initial purchase price. In this case, any negative gearing will not be to your benefit as you are losing more money than you are making.

CLAIM EVERYTHING YOU ARE ENTITLED TO

If you want an easy way to collate your data for tax time, use our rental property spreadsheet here

Make sure you claim everything you are entitled to and take note of these common expenses that most clients miss:

Insurance (often filed in the insurance file and not in the rental property file)
Interest (you can't claim what you pay on the loan repayments, just the interest on the loan)
Rates (Water and council rates)

Have inquiries about property taxes and need assistance?

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