Tips For Saving on Property Taxes
The very first thing you need to know as a landlord is that almost every property expenditure is tax deductible. You may also need to know that even though rental income is not affected by VAT, your daily property running costs may be. There is a whole complex labyrinth of taxable and non-taxable transactions that you need to master, or at the very least be aware of to ensure that you do not give the taxman more money than you necessarily should.
The thing about trying to save on tax is that it is not all about keeping more money out of the taxman’s hand and in your pocket, but it also about avoiding hefty fines and even jail time by not making ignorant mistakes. Remember that being ignorant of the law does not a good defense make. With that in mind, here are a few tips for saving on property taxes.
What you can offset
You can offset:
- Agent management fees
- Service charges
- Buildings insurance for freehold properties
- Maintenance and repair cost during occupancy. This only applies to wear and tear but not to improvements or aesthetic additions to the house.
- Cleaning costs
- Mortgage interests
- Accountancy charges
How to save through maintenance and repairs
There is a little loophole in the taxation law of which most landlords are not aware. Did you know that you could claim up to 10% of your net rent to take care of depreciation? Logic dictates that your property will experience some wear and tear during the taxation year. If for some reason, you spend more than 10% of your net income on these repairs, then you can claim up to 10% of that in tax allowance. The trick is, even if you do not spend up to 10% of your rental net income, you can still claim as much anyway. This should give you back a tidy sum, assuming your tenants don’t completely destroy your rental property.
Joint-ownership transfers leeway
If your spouse is in a lower tax bracket, then you can either choose to transfer the property on to their name or simply make it a joint-ownership arrangement. This will give you a chance to save on the income tax attached to the annual profits. It will also give you a chance to save on the capital gains tax in case you choose to sell. This is because both of you will be able to apply for your annual capital gains exemption on the capital profit you make from the sale.
There is a myriad of ways to save on your annual property taxes but you will only get to know about them once you get well versed with the entire process. You need to know which taxes you have to pay and from which ones you are exempt. You also need to know all you can about VAT and SDLT. The best course of action here is to work constantly hand in hand with a professional tax expert. Only then will you get to pick up on all the possible saving opportunities.
Sometimes, It’s Not All About The Tax Breaks
I’ve known some people who opt for a negative gearing scheme in order to earn additional tax breaks year after year. While you may find accountants or finance experts who will swear by this ‘long-term’ strategy, I’ve seen a lot of investors burned up by gearing their properties negatively, because they’ve unwittingly ended up sacrificing on their current cash flow and profitability.
One of the most detailed accounts I’ve come across about the subject of Negative Gearing is this Rick Otton Podcast: #66 Start Making Your Property Work For You!
So before going crazy on trying to squeeze out every bit of tax break you can from the government, always remember to keep profitability and cash flow as your main priorities. After all, businesses that don’t make money eventually fold!