Have you ever wondered if you’re making the most of your real estate investment? Whether you’re new to property investing or have been doing it for some time, accounting can often feel challenging. Mistakes can lead to unnecessary costs and understanding the complexities of tax regulations and financial statements isn’t always easy. In this blog, we’ll explore some common accounting mistakes to avoid, along with some helpful suggestions to help you stay on course with your investment management.
1. Overlooking Capital Gains Tax (CGT)
One of the most common mistakes property investors make is not fully understanding the implications of Capital Gains Tax (CGT). When you sell an investment property, the profits (or capital gains) are taxable and the tax rate can significantly impact your return on investment. Some investors mistakenly assume that CGT won’t apply or fail to calculate it correctly, which can lead to an unexpected tax bill.
How to Avoid It: Keep detailed records of your property’s purchase price, improvement costs and any expenses related to the property over time. This documentation can help reduce your taxable capital gain, as it helps calculate your property’s cost base more accurately. Consulting an investment property accountant can help you optimise your tax strategy.
2. Improperly Claiming Deductions
Property investors often miss out on deductions that they are entitled to claim, such as depreciation or interest on loans. On the other hand, some may claim deductions incorrectly, like personal expenses that are not related to the investment property. Both under-claiming and over-claiming can cause financial issues, leading to tax audits or lost savings.
How to Avoid It: Keep thorough and organised records of all expenses related to your investment property. For instance, costs associated with repairs, maintenance and property management may be deductible, but improvements may not be. It’s also advisable to have a professional prepare or review your tax returns to help verify that all allowable deductions are properly claimed.
3. Misunderstanding Depreciation
Depreciation is an often-overlooked benefit in real estate accounting. Many investors fail to claim depreciation on assets like buildings, fixtures and fittings, which can reduce their taxable income. Without understanding depreciation schedules, you might miss out on significant tax savings.
How to Avoid It: Consider hiring a quantity surveyor to prepare a depreciation schedule for your property, which can help outline potential claims each year. An investment property accountant may assist with documenting and applying these claims.
4. Failing To Separate Personal & Investment Finances
Mixing personal and investment-related finances is a common mistake that complicates accounting and may lead to inaccurate tax reporting. If you’re using the same bank account for personal expenses and property-related costs, it can become difficult to track what’s deductible and what’s not.
How to Avoid It: Consider opening a separate bank account for your real estate investments to simplify tracking income, expenses and other financial activities related to your property. This separation can also help make tax reporting easier and offer clearer insights into your investment’s financial performance.
5. Neglecting To Plan For Cash Flow
Cash flow management is important for real estate investors, but many overlook the need for a detailed plan. Ongoing expenses like property maintenance, management fees and vacancy periods are often underestimated. Without proper planning, unexpected costs can lead to financial strain.
How to Avoid It: Consider creating a cash flow forecast that includes all potential expenses and sets aside funds for emergencies. Budgeting for regular and unexpected costs can help maintain liquidity to manage your property. Revisiting your cash flow plan annually or when circumstances change can support financial management.
Contact Us For Property Investment Accounting Guidance
At Blue Orchid Accounting, we understand the unique challenges faced by property investors. Our tailored services include tax planning, cash flow management and maximising deductions. Whether you’re seeking an investment property accountant or need assistance with Central Coast taxation, reach out to us today.
Since 2011, Blue Orchid Accounting has been providing clients throughout the Central Coast with a comprehensive range of taxation and accounting services. We strive to provide friendly, straightforward advice, helping ensure you’re enabled to make smarter financial decisions and further safeguard your wealth.
