The tax deduction experience is a notorious time-killer that often totals to an insignificant sum that wasn't worth half the effort you put in. Investment properties have remained a firm favourite for those wanting to diversify their wealth, but have often been written off due to the vast expenses and taxes incurred from renovations, rental income and other hidden costs.
However, there are a slew of tax-deductible expenses that property investors are commonly overlooking when it comes to bolstering their tax returns. That’s where this blog post will be able to help.
Whether you're already set on buying an investment property or merely flirting with the idea, we're here to explain all the ins and outs of the tax benefits that make investment properties a very exciting and attractive prospect.
What are Tax Deductions?
In short, tax deductions are items or expenses that are subtracted from your taxable income in the form of a tax return at the end of a financial year. These deductions are usually provided through two forms: a fixed, single deduction based on marital and filing status (otherwise known as a standard deduction) or a series of itemised deductions provided by the individual.
If your tax-deductible expenses total more than your allocated standard deduction, you can itemise your expenses according to your own financial situation to maximise the returns received.
In the case of investment property tax deduction, it makes sense to itemise your deductions as you can claim deductions for a myriad of investment-related expenses, as well as depreciation. Both of which will be discussed further down the article.
What Can You Claim on an Investment Property?
Knowing what you can and can't claim in regards to investment property tax deductions will undoubtedly boost your tax return. Many property investors aren't well-acquainted with guidelines listed by the Australian Taxation Office (ATO) and as a result, are missing out on vast capital gain.
We're here to reassure you that it doesn't take a qualified tax professional for you to educate yourself on these benefits and achieve the positive cash flow from your investment property that you've always dreamed of.
Something to keep in mind before we move on, however, is that investors are only able to claim for tax deduction on their property during periods in which the property is either occupied by a tenant or completely available to rent out.
The following deductions listed below will equip you with extensive knowledge and situational examples on the optimal ways to maximise your investment property tax deduction.
Appliance and Building Depreciation
As long as your property was built after 16 September 1987, you are eligible to claim a 2.5% depreciation deduction on the original construction cost for up to a 40-year period.
For instance, if the construction costs of the building totalled $300,000 in 2000, you could effectively claim $7,500 every year until 2040 under the assumption that the property is available for rent throughout this 40-year span. At a moderate estimate, if depreciation deductions are claimed for 25 of the 40 years, that would amount to a financial value of $187,500. A pretty penny saved, to say the least.
Similarly, depreciation principles apply to appliances that are made available to tenants during their stay such as dishwashers, dryers, stoves, ovens, etc. The guidelines that govern appliance depreciation are, however, at the discretion of commissioners and what they determine to be the "effective life" of the depreciating asset.
Unlike other tax-deductible opportunities outlined within this article, any rental income received does indeed account for a portion of your assessable income. This typically includes any monetary payments you receive upon renting out your property (whether it is paid directly to you or through an agent), as well as any payments received in the form of goods and services.
Furthermore, rental bond money must be included as part of your reportable income if you become entitled to retain it due to a tenant defaulting on the rent or reimbursement for damage to the property.
Maintenance, Repairs and Renovations
According to the ATO, maintenance and repair expenses are both eligible to claim as an immediate deduction as long as they are not subject to either substantial improvements or repairs made immediately after the initial purchase. Any repair work done to maintain the condition of the property, as well as tools and appliances is fair game.
These may include but are not limited to examples such as:
- Painting the inside and outside of the house due to general wear and tear.
- Garden upkeep.
- Plumbing maintenance due to clogged drains, leaking pipes, etc.
- Repairing essential household appliances provided to the tenant such as a dishwasher, oven, washing machine, etc. (as long as you don't purchase a brand new replacement, however, deductions can still be claimed under appliance depreciation.
- Repairing broken parts of fences or broken glass in windows.
- Replacing awnings or roof tiles after severe weather conditions such as hail, storms, etc.
Although renovations to the property fall under the category of substantial improvements and are ineligible to claim as immediate deductions, it is possible to claim depreciation on renovation costs (at the same rate and period as building depreciation) if the structural improvements were scheduled after 27 February 1992.
Unless you are looking to privately rent your property to a predetermined tenant, advertising your rental property is a costly but necessary expense to avoid extended vacancy durations. However, unknown to most, the use of advertising platforms to find prospective tenants is a completely tax-deductible expense.
Advertising rates will vary highly according to state, area and among agencies and typically, it is estimated that the time taken to find a new tenant can range anywhere between a few days to 6 weeks.
Joust estimates that a 4-week rental listing could set you back as much as $387.
Loan interest is by far the most significant tax deduction available to property investors and the most popular.
Whilst it isn't possible to deduct the initial amount of money borrowed, it is possible to claim interest accrued over the duration of your loan as a tax-deductible expense. However, as with all the other investment property tax deductions listed in this article, you cannot claim repayments if the loan relates to personal property.
Another way you can utilise loan interest to your advantage is to opt for an interest-only loan home loan, which means that you only make interest repayments and disregard regular payments for an allocated period of time. This results in all of the repayments made toward the loan for the initial set period being eligible for tax deductions, which can help bolster your financial position in the short term.
To give an example:
You take out an interest-only loan of $600,000 to finance the purchase of a nearby rental property you've been eying up at a rate of 3.25%. You were proactive and managed to rent the property out as soon as the purchase was finalised. You incur an interest expense of $19,500 and the property was occupied for the duration of the entire year.
The $19,500 is a fully tax-deductible expense.
Local governments impose council rates on homeowners within their district to raise capital that helps fund various services and facilities within the area. This may include fees for waste management, fire services levy, or municipal charges.
When it comes to rental property, these council rates can be waived as tax deductions during the periods in which the property is being rented out. Meaning, if the property is occupied for 250 days of the year from March 21st to November 26th, any fees paid to the council during this period will be eligible for a return.
According to the ATO, any properties that generate taxable income qualify for deductions when it comes to land tax.
It is worth noting, however, that regulations surrounding land tax and deductions vary greatly from state to state, whether it be the levy amount or the timing in which you are able to claim deductions. Therefore, it is highly recommended that you seek professional advice from a tax advisor or state department to ensure that you are claiming the correct amount.
Similarly to that of council rates, if your investment property is on a strata title where you share a "common property" with neighbours, you are eligible to claim any body corporate fees as immediate deductions.
Strata title properties generally take a number of forms, with apartments and townhouses the most well-known, but they also exist for private roads, commercial property, and retirement villages.
A more obscure entry in this list, professional pest control services are completely tax-deductible for both the landlord and the tenant depending on who made the payment.
Average pest control services in Australia differ from area to area, but generally speaking, an internal and external spray treatment tends to sit anywhere between $100-200.
There are two main ways to claim tax deductions from insuring your rental property. You can claim tax breaks for all the expenses incurred from insuring your rental property itself, as well as any expenses from landlord's insurance as well.
For instance, if you were to insure a 3-bedroom house in NSW for building-only insurance and landlord insurance, Finder estimates the average monthly cost to be $117.20 and $208 respectively. In this particular scenario, you would be looking at annual tax deductions of $3,902.40.
Let's face it, crunching the numbers for your investment property can become an arduous and daunting task, especially if you have little time on your hands. That's why most landlords opt to outsource these tasks to an accountant.
You'll be happy to know that any costs associated with bookkeeping are all fully tax-deductible. This may include costs of consultation, management of rental accounts and investment property finances, as well as tax return preparation.
Any fees paid to agents who collect rent, find tenants and maintain your rental property are all deductible from your income tax.
One thing to keep in mind, however, is that these fees must directly correlate to rental properties, as fees paid to agents for the sale of an investment property are ineligible to claim.
Stationery, Phone and Internet Costs
Simply put, any stationery, phone, and internet expenses can be claimed as an investment property tax deduction if they directly contribute to the management of your rental property. You will, of course, need to provide the appropriate documentation.
You are unable to claim travel costs to the rental property for maintenance or inspection as a tax deduction unless you are in the business of letting rental properties (owning multiple rental properties is considered an investment, not a business), or an exempt entity listed by the ATO.
Any legal expenses incurred due to rental activities are considered to be tax-deductible.
For example, if you have to take a tenant to court over unpaid rent or eviction, then you can claim expenses from the legal action, as well as any preparation of legal documents for the legal action as a tax rebate.
Negative gearing is essentially a method of offsetting your losses on an investment property by deducting these losses from your overall assessable income.
Whether or not your investment property is bringing in a negative cash flow is determined by your pre-tax financial position. Hence, if your overall expenses (i.e. maintenance, fees, loan repayments, etc.) total more than the income earned from the rental property, you are able to deduct the negative difference (income - costs) from your taxable income.
Although negative gearing may seem counterintuitive at first, it is helpful when it comes to minimising excessive short-term losses before selling on your property for a profit later down the line. Since selling properties for a profit will incur the capital gains tax, negative gearing can be used in combination with CGT, to maximise your return on investment if you know what you are doing.
This ability to effectively continue to deduct ongoing losses from your taxable income while owning a property means that you are paying for only a proportion of the loss and by doing so you are ultimately improving your chances of reaping larger profits.
Capital Gains Tax
The capital gains tax (CGT) is the tax you pay on profits from selling assets, such as property, shares, or a business.
CGT can take a huge cut of profits made on property sales, as many houses generally see a profit upwards of $100,000 and 100% of the profit from the sale is added to your taxable income. But, if the investment property has been held under your name for more than 12 months, then CGT is reduced by 50%, resulting in only half the profit contributing toward your assessable income.
This is why most savvy property investors often choose to pair the benefits of negative gearing with an eventual sale, as they are able to hold the property for longer with fewer initial losses while the property's value continues to trend upwards.
What Can't You Claim On an Investment Property?
Although each section covers what you cannot claim as an investment property tax deduction to great detail, here is a short summary of ineligible claims:
- Expenses incurred through the personal use of your investment property
- Building depreciation for properties constructed prior to 16 September 1987
- Repayments of the principal sum of the loan
- Interest if any part of the loan is used for private purposes
- Renovations conducted before 27 February 1992
- Agent fees for the purchase or sale of investment property
- Travel expenses for the management and inspection of rental property
Investment Property Tax Deductions Example
Here's a fairly straightforward scenario to help you understand just how much tax you can save from being familiar with all the eligible deductions upon setting up your investment property:
Steven takes out an interest-only loan of $550,000 at a rate of 3% for a 3 bedroom house in NSW that he plans to set up as an investment property.
The property was constructed on 12 April 2002 for a cost of $120,000 and is part of a strata title since it sits on a private road. He plans to rent the property out as soon as possible, so he consults the help of an agent to help him list his property up for rent.
He finds some issues with plumbing and ants since the house has been unoccupied for an extended period of time and thus, he calls in a plumber and pest control specialist to take care of these issues.
In order to be safe, Steven applies for home and landlord insurance for the property.
What can Steven claim?
Ultimately, it is clear that knowing what you can and can’t include as a tax deduction on your investment property can save you thousands of dollars. Accordingly, tax time should be an essential part of anyone’s investment strategy to save capital that can be re-injected into your property to boost its value.
Another way to ensure you have the highest possible amount of capital available is finding the right home loan with the best rates. Joust Live Auction allows you to put your mortgage on a marketplace, allowing for bidders to fight for your loan by offering competitive rates on the market. For more information on our digital marketplace, click here.