November 25, 2016

Negative gearing: What you can and can't claim if your investment property is empty?

New property developments are bursting out of the ground across Australia, particularly in Victoria and New South Wales.

Australia has more than two million landlords yet despite the boom in new properties up for grabs, thousands are sitting empty.

In Sydney alone, some 80,000 properties are vacant.

In taxation statistics from the Australian Taxation Office, the amount of net rental loss claims has decreased from the 2011-12 to 2013-14 financial years, while net rental incomes has increased.

But according to property tax specialist Shukri Barbara, many foreign investors who have bought properties outright reap more benefits by leaving them empty.

"If you don't have a need for cash, and all you're doing is sinking your funds into an asset, then in the current economic environment in Australia, particularly in Sydney and Melbourne, the markets are thriving and the values are thriving because of low interest rates," he told 702 ABC Sydney.

"Given the large number of developments, it's not surprising that, especially overseas people, leave them empty.

"If you don't need the cash ... you can leave it empty."

Are owners getting tax benefits?

Negative gearing a property is possible when your rental expenses exceed your rental income.

Those expenses come from items like loan interest, maintenance costs, strata fees, rates and taxes and insurance.

People who negatively gear expect the house value to appreciate; that by taking a loss now, the house will sell for more than what they bought it for.

If a home is left empty by choice and there is no rental income coming in, then you are unable to get a tax deduction from the government.

If you try and claim rental losses when there is no revenue, Mr Barbara said that was when the Tax Office would put you on their radar.

"[ATO] will start putting in the query to do an audit," he said.

"They'll look at whether it's a genuine investment purchase.

"You have to demonstrate an effort that it is being put out for business."

What happens if you can't find a tenant?

Mr Barbara said if the property stood empty while you had it listed with a real estate agent in the process of looking for a tenant, all the expenses would be allowed for a tax deduction.

He cited some of his clients in north Queensland who had been unable to find renters for their older property given a massive new development next door that was able to offer cheaper rent and newer premises.

While the rental property remains vacant, the owners are still able to negatively gear that property.

"The concept is that you are in the business to make a profit out of rental," Mr Barbara said.

Can you negatively gear a holiday home?

If your holiday house is purely there for you to enjoy, then you can't claim it as a tax deduction, Mr Barbara said.

However, if you make it available for short-term rentals and have it listed with an agent, then you are allowed to apportion the expenses for those periods.

For example, if you stay in your beachside house for two weeks and rent it out to other holidaymakers for the rest of the year then you can claim a tax deduction on those 50 weeks.

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