Are You Aware of These Investment Property Tax Deductions?
Many people choose to buy an investment property to boost their cash flow through regular rental income. Property investors are allowed several expense deductions by the Australian Tax Office (ATO) for periods their properties are rented out or genuinely available for rent. Investors can write off their investment costs against taxes if their expenses and interest payments exceed their property returns during a financial year. This is also known as negative gearing. Negative gearing helps in mitigating short-term losses through tax deductions to maintain a regular cash flow.
However, negative gearing is not the only tax benefit available to property investors. If you’re renting out a property, you can claim a whole lot of other rental expenses, including the cost of marketing your property for tenants. Yet many investors are unaware of the eligible investment property tax deductions. This post will help you save money on your tax bill by acquainting you with the top tax deductions you can claim on your rental properties:
1. The Interest on Your Investment Loan
The ATO lets you claim the interest charged on a loan for an investment property, including the bank fees for that loan. So, if you incur $10,000 in interest on your loan and $100 in loan fees, you can claim these amounts on your personal tax return. However, you cannot claim any repayments on the principal sum borrowed for an investment property. You are also unable to claim interest for the entire loan if a part of it has been used for private purposes.
2. Depreciation Deductions
With time the structure of your property naturally becomes old and worn out, and may require renovation to maintain its structural integrity. Similarly, the fittings and fixtures in a property also wear out over time and decrease in value. The ATO uses the term depreciation to describe the gradual loss in the value of an asset over time. It also allows you to depreciate rental assets under two categories, capital works and plant and equipment assets.
Capital Works Deductions
Capital works deductions relate to the construction costs of an investment property. Under this category, you may be able to claim a deduction on the depreciation of the building’s structure and the renovations made to it. You can claim a depreciation deduction of 2.5 per cent annually on construction costs for up to 40 years – which, as per the ATO, is the length of time a building lasts before it needs replacing. However, you can’t claim a deduction on the original construction costs if the property was built before 16 September 1987. Similarly, you can’t claim depreciation deductions on renovations made before 27 February 1992.
Plant and Equipment Depreciation
Much like your building’s structure, the fixtures and fittings in it also wear out with time. As these items (like the appliances in your house) wear out, their value is gradually reduced, which is known as depreciation. The good part is that you can claim this depreciation over several years, depending on the effective life of the item. You can visit the ATO website for a comprehensive list of the estimated useful life of various investment property plant and equipment assets you might be able to claim. It’s also important to note that you can no longer claim depreciation on second-hand assets unless those assets are being used as part of a business. .
Top tip: It’s usually a good idea to hire a quantity surveyor to prepare a depreciation schedule for your property to maximise your return. The fee you pay to a quantity surveyor can also be claimed as an investment property tax deduction.
3. Rental Expenses
You’re likely to incur several expenses when you put your investment property up for rent, but you can claim a wide range of these expenses on your personal tax return. For instance, if you need to advertise to find tenants for your property, you might be able to claim the marketing costs, including the money spent on listing websites and printing fliers. Alternatively, you might prefer to hire the services of a property manager to find tenants and manage your rental properties as well. The fee that you pay to your property manager can also be claimed as an investment property tax deduction. It’s also possible to claim the legal expenses related to rental activities and your rental insurance premium. However, travel expenses related to your rental property may no longer be claimed.
4. Repair and Maintenance Costs
Any money you spend on repairing or maintaining the property to continue renting it out is eligible for a tax deduction. This can include essential repairs like plumbing, and even pest control treatments that you paid for. You can also claim the council rates in the year they are paid and the body corporate fees for properties on strata title.
In a nutshell, knowing what rental expenses are eligible as tax deductions can help you maximise your savings. However, it’s important to remember that you can only claim deductions for expenses related to the income-producing use and not your personal use of the property.
If you’re a beginner investor or in the business of renting out properties, it might be worth consulting a financial advisor to make the most out of the tax deductions available to you. In case you’re considering an investment property purchase, a specialist broker can help you better understand investment loans and assist you in the process of applying for one.
