Knowing about your investment property tax deductions will undoubtedly boost your tax return.
However, many investors miss out on expense claims because they aren’t equipped with the knowledge presented by the Australian Tax Office (ATO).
Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having a positive cash flow.
The following list will give you useful tips on the best ways to maximise your investment property tax deductions.
What Investment Property Expenses Can You Claim?
Just as it is for vehicles, general wear and tear on your investment property is inevitable. The wear and tear consequences will affect your property’s financial value.
This is referred to as depreciation.
Luckily, for property investors, depreciation is a rental property deduction. A non-cash tax deduction which can be claimed over time and offset against your income. In other words, it’s not an immediate deduction.
Capital Works Depreciation (Division 43)
Owners of investment properties that were built after September 16, 1987, can claim a tax deduction on the building depreciation costs.
If you decide to renovate your investment property, the construction cost is also tax-deductible as a rental property deduction. However, unlike the maintenance expenses, the construction costs are not fully deductible in the same year you pay them.
You can claim the costs in portions over several years. This is known as a capital works deduction. This is a non-cash investment property tax deduction similar to plant and equipment depreciation.
You can generally claim 2.5% of the construction cost per year from the time that it was built, for 40 years.
Layla built a home on her investment property in 2001 for $400,000. She can claim an investment property tax deduction of $10,000 per year until 2041 due to the building’s depreciation.
Plant and Equipment Depreciation (Division 40)
You can similarly claim depreciation for wear and tear on any investment properties fixtures and/or fittings.
Fixtures and fittings include things such as carpets, blinds, air conditioning, an oven, and showers, for example.
Note: To maximise the return on your investment, you should possibly seek the advice of a quantity surveyor. They can help prepare a depreciation schedule for your investment property. The bonus here is that the fees are an investment property tax deduction.
2. Loan Interest
This is the biggest investment property tax deduction you can claim.
If you had to take out a loan from the bank to purchase your investment property, you are entitled to claim any interest charged on the loan as a rental property deduction.
Jane took out a loan of $420,000 to purchase an investment property. She rented out the property for one year, starting in September 2021.
In that same year, she incurred $12,600 in interest on her loan.
The interest that Jane incurred is an investment property tax deduction because the loan was used for income-generating purposes.
If, however, part of the loan was used for private purposes, you won’t be able to claim interest on the total size of the loan; instead, you can claim on the apportioned part of the loan used for income generation.
Sam took out a loan of $650,000. He used $635,000 to purchase his investment property and used the remaining $15,000 to pay for his European holiday.
Sam rented out his property for one year, starting November 1, 2020. In the same year, he incurred a $22,750 interest expense on the loan.
Because part of the loan was used for private purposes, Sam won’t be able to claim the entire interest expense amount as an investment property tax deduction – only the portion related to his investment property.
He can do the following calculation to work out how much interest will be tax-deductible:
Total interest expense x (investment property loan amount ÷ total loan amount) = tax-deductible interest
$22,750 x ($635,000 ÷ $650,000) = $22,225.
3. Rental Expenses
As a landlord, you are liable for all rental property expenses that can be deducted each year. These expenses can be claimed in the same tax year you paid them.
Using advertising platforms to find tenants for your property is a tax-deductible expense.
Rental Agent Fees
If you choose to appoint a property agent to manage the property and maintain a good relationship with your tenants, they will be entitled to a fee that usually amounts to between 6% and 8%. Having a rental agent can be an investment property tax deduction.
You may wish to seek legal assistance when it comes to preparing the rental documents. Or you may find yourself in a situation where you will need legal counsel to assist you in obtaining an eviction order. Legal counsel is an investment property tax deduction.
These expenses cover the cost of the rubbish collection and maintenance of the street on which your property is located. If you are paying the council rates and not the tenant, you can claim this as an investment property tax deduction.
If you are the one responsible for paying the water, electricity, and/or gas, you can claim these expenses as an investment property tax deduction. If you require the tenant to pay for the utilities, you can’t claim it as a rental property deduction.
To protect your property and its contents, rental insurance is a no-brainer and a tax-deductible expense.
Repairs and Maintenance
If the work done on the property maintains it and does not improve it, you can claim this as an investment property tax deduction.
Maintenance relates to repairing the wear and tear of the building. You may need to hire a professional to replace any broken roof tiles. But if you decide to replace the carpets with wooden floors in a bid to improve the property and consequently increase its value, you can’t claim it against repair and maintenance costs.
Hiring a pest controller to rid the property of pests is an expense incurred while ensuring that your investment property continues to generate rental income. So, you can claim a rental property deduction as an immediate investment property tax deduction on your annual return.
As long as you have rented out the house on your property, you can claim the land tax as an investment property tax deduction.
Note: Each state has its own regulations concerning land tax, so consult a tax advisor on how to ensure you submit the correct claim in the right year.
Should you decide to use a tax advisor to assist you in submitting your land tax claim, these fees are also considered immediately tax-deductible.
For example, if your rental agreement with the tenant includes a weekly cleaning service, this would be an investment property tax deduction. Similarly, the expense of having the property well cleaned after the tenant vacates the property is tax-deductible.
The garden maintenance and replacement of plants and/or garden structures on your investment property is a claimable expense. However, any improvements made to the landscaping that will increase the property’s value will not be claimable under gardening expenses.
Body Corporate Fees/ Strata Rates
If your investment property is a unit or a townhouse, you must pay body corporate/strata fees. This fee covers building insurance and the maintenance of shared areas. It is an investment property tax deduction if you (not the tenant) pay it.
Stationery, Phone, and Internet Costs
Renting out your investment property is similar to managing a business. Any stationery, phone, and internet usage can be claimed as an investment property tax deduction if they relate to the management of your investment property.
Any bank fees charged on the loan used to purchase the investment property are tax-deductible.
The fact that accounting fees are tax-deductible is a good incentive to have an accountant manage your tax returns and find ways to maximise your tax return.
What Can’t You Claim on an Investment Property?
According to the ATO, expenses that aren’t considered investment property tax deductions include:
- Expenses incurred through the personal use of your investment property
- Borrowing expenses on your investment loan, such as the repayments of the principal amount
- Solicitor and conveyancer fees for the purchase or sale of the property
- Other expenses incurred during the purchase or sale of the investment property
- Stamp duty fees charged on the transfer of property into your name
- While you used to be able to, you can no longer claim travel expenses to carry out the inspection of your rental property
Can You Claim a Tax Deduction for Capital Gains Tax (CGT)?
Capital gains tax (CGT) is a tax applied to the capital gain made on the disposal of any asset, with some specific exemptions like the family home. It treats net capital gains as taxable income in the tax year when an asset like property or shares is sold or disposed of.
You can’t directly claim a tax deduction for capital gains tax itself. However, when calculating your net capital gain, you can deduct certain expenses (by adding them to the cost base of your property) related to earning the gain. This can help reduce the capital gains tax you must pay.
Some costs you can add to your cost base (and in turn, deduct from your capital gain) include:
- Purchase costs of the asset, like conveyancing fees or stamp duty
- Improvement costs like renovations or extensions
- Selling costs like advertising or agent commissions
So while you can’t directly claim CGT as a tax deduction, deductible expenses related to earning the capital gain can be used to reduce your tax liability
Another way to reduce your CGT liability is to hold onto it for at least 12 months before you sell it. If you own the property for more than 12 months before selling it, you are eligible for a 50% discount on your CGT. This means you must only include half of the capital gain in your tax return.
- To maximise your tax return, make sure you use the ATO’s comprehensive list of claimable rental property deductions.
- With this knowledge, you can take advantage of all the tax return opportunities available through your investment property.
- You can’t claim any of the listed expenses as investment property tax deductions without proof.
- Make sure you always keep receipts, invoices, and any other documents relating to the expenditure of your income-generating investment property.
What Is Tax-Deductible on an Investment Property?
You can deduct ordinary expenses like mortgage interest, property taxes, insurance, maintenance, repairs, utilities, and depreciation on the buildings. You can also deduct costs related to managing the property, like legal fees and travel to the property. Capital improvements must be depreciated over time.
How Do I Offset Tax on an Investment Property?
You offset tax by deducting all allowable expenses associated with earning the rental income. This includes mortgage interest, property taxes, insurance, maintenance and repairs. You also deduct a portion of the property’s value each year through depreciation deductions. These reduce your net rental profit, which is subject to tax.
How Do I Maximise My Tax Return on an Investment Property?
To maximise deductions, accelerate repairs and maintenance, like painting or roof repairs, into the current tax year. Also, track all expenses related to the property, no matter how small. Claim depreciation instantly by filing a first-year tax return when the property is acquired.
How Do You Calculate Tax Return on Investment Property?
Add up all the rental income received. Then total allowable deductions like mortgage interest, property taxes, insurance, repairs and depreciation. The net profit left is reported on your tax return. Tax is calculated on this net profit amount based on your income tax rate.