“The wise young man or wage earner of today invests his money in real estate.”
“Real estate investing, even on a very small scale, remains a tried-and-true means of building an individual’s cash flow and wealth.”
“Buy land, they aren’t making anymore.”
Investing in property has long been known as the most surefire path to creating solid, dependable cash flow and wealth. Protecting this cash flow and wealth also means being aware, and taking advantage of, tax benefits that are available for any property investor to use. You won’t be able to avoid paying taxes completely and live a completely tax-free life but there are many available exemptions and deductions available to the average property investor that will keep more money where it belongs… in your pocket.
Tax Benefits as a Property Investor
Understanding how to leverage the tax system in your favour is one of the best long-term investments you can make. When it comes to rental income, property tax, paying capital gains tax, leveraging a rental property, or buying a new property, there are significant deductions that could save you £1,000’s every year. What are these deductions?
- Mortgage Interest Relief
At one point in the UK, you were allowed to deduct the entire cost of your mortgage interest against your income as a cost of running an investment property. Recent changes have amended that amount to 20% of the total interest accrued, which is then applied yearly as a tax credit.
- “Renewal and Replacement” Allowances
This allowance is designed to help with the cost of replacing or renewing items that are used in an investment property. It can not be used to deduct the cost of items purchased when setting up your rental property. It is also meant only to replace a like time, which means that if an upgrade is bought, only the cost of a like replacement can be deducted. Also, if there was money made from the sale of an item being replaced, it must be accounted for and deducted from the cost of the replacement.
- Maintenance and Repair Costs
General maintenance and repairs, such as repairing fence panels, painting, cleaning, and yard maintenance are all deductible expenses. Major repairs also are considered allowable expenses, such as emergency plumbing or electrical work. Broken roof tiles, boilers and redecorating to return the property to its original condition also qualify.
- Research and Ongoing Training Costs
Learning how to be a good property investor takes education and dedication. Industry magazines and seminars, as well as professional and personal development materials all contribute to your level of success and can be deducted at tax time. Research and training in an entirely new type of industry are not allowable and are considered personal expenses but property research expenses should be allowable. Ask your tax professional if you have any questions.
- Financial Rental Losses
If you suffer rental losses in a given year, they can be set against the profits of any other letting properties you own. General losses are not allowable against your other income but may be put forward to be used against any future rental profits.
- Administration Costs
Telephone, internet, post, and fax are all costs that are incurred in the operation of your investment property. These costs are all eligible to be used as a tax deduction as they are the direct result of you operating and owning your investment property.
- Vehicle and Motor Costs
Do you drive from property to property to inspect your investments? Or perhaps you drive from meetings with potential renters or would-be investors. These expenses are all deductible and while the total expenses used for business must be separated and distinguishable from personal use of the vehicle, these deductions can become significant.
- Property Allowance
You may be able to claim a property allowance of up to £1,000 but if you choose this, you are not able to deduct any other expenses.
You may travel for your investment properties for any number of reasons. You could fly to research new properties, take a taxi to a business meeting, or catch a train to your newest acquisition. These costs are legitimate and because it is important to ensure that all costs fall within the realm of the tax law, ask your tax professional what costs (and how much) are deductible.
- Legal Fees
Property investing is full of legal fees. Almost all these fees are completely deductible and should be included in your end-of-year tax returns.
Tips and Tricks for More Tax Benefits
- Qualify for Private Residence Tax Relief to Reduce Capital Gains Tax Bill
If you lived in the property before you sell it, even if it is currently being used as a rental, you may be eligible for Private Residence Relief. There are limitations on this relief but if you qualify (must have lived in the property in the last 9 months before using it as a rental), you may not have to pay capital gains for the time you lived there and the time directly after you left.
- Set Up a Property Investment Company
Limited companies follow different rules and are subject to an entirely different set of tax exemptions. For example, limited companies pay much less tax (corporate tax is 19%) and they are allowed to expense the entire cost of financing a property (all the mortgage interest). Starting and operating a limited company, as well as getting your money out of it, is not a simple process and should be discussed with your tax professional before considering any such actions.
- “Rent a Room”
The Rent-a-Room scheme allows you to earn up to £7,500 of rental income tax-free if someone is renting a furnished dwelling in your home. If you choose to use this allowance, you are not allowed to claim any other expenses. Even though cannot claim them, it is a good idea to keep records of expenses, should you be called upon by the government to provide records.
- Invest in Commercial Property
Commercial property is substantially different from residential properties, particularly from a tax perspective. How much you pay for capital gains tax, what you owe when you sell the property, and many other deductions allowed for tax purposes differ from their residential counterpart and may be a worthy consideration for the ambitious property investor.