Owning an investment property is a good option for increasing your cash flow through regular rental income. Additionally, the Australian Tax Office (ATO) allows several deductions for expenses to property investors that can significantly reduce your annual tax bill and contribute to a positive cash flow.
Unfortunately, many property investors are not aware of the available tax deductions and lose out on a big chunk of money. Some might find the rules to be complicated and miss out due to confusion. For example, it is essential to know that investors can only claim deductions for the period in which the property was rented out or genuinely available for rent. You’d also need proper paperwork to substantiate your claims.
In this post, we will take you through the top tax deductions that you can claim on your rental property as an investor.
1. Home Loan Interest
The two most significant components of your home loan repayments are the principal and interest components. The principal is the amount of money you borrow to purchase your house, and the interest is what the bank charges for lending that money to you.
As an investor, you can claim the interest charged on your investment loan and any bank fees you pay for servicing that loan. Suppose you incur $1,000 interest on your loan each month in addition to $50 in loan fees. In that case, you’d be able to claim these amounts in your tax return. However, you cannot claim interest on the entire loan if you have used some part of the loan for private purposes.
2. Rental Expenses
Property investors often rent out their homes to generate income. However, there are several expenses you must incur to put your house on rent. Fortunately, the ATO lets you claim most of your rental costs, which can help in maintaining a positive cash flow. Some of these expenses are:
Suppose you need to advertise to find tenants for your property. In that case, the costs you incur on marketing will be tax-deductible, including the money spent on fliers, listing websites, printing brochures and photography fees.
Legal expenses related to rental activities are tax-deductible. For example, you may need legal help to evict a tenant or go to court for unpaid rent. In such situations, you can claim the costs for the entire legal process, including the preparation of relevant documents.
Rental Agent/ Property Manager’s Fees
If you have multiple properties or tenants in another state, you’d perhaps enlist the services of a rental agent or property manager to manage your rental properties and tenants. The best part is that you can claim the fee you pay to your property manager to handle your rental properties.
You can even hire an accountant to manage your tax returns and find out ways of maximising it. The fees paid to your accountant can be claimed as a deduction.
Council rates can be deducted in the year they are paid. However, the deduction is only available when the property is rented out.
You can claim body corporate fee costs for properties on strata title. However, if you are claiming strata fees that includes maintenance and garden expenses, you shouldn’t claim these separately.
Repairs and Maintenance
The money that you spend on repairs or fixing general wear and tear is tax-deductible. However, please don’t confuse it with property improvement. For example, if you repair broken tiles or replace them with tiles of similar quality, you can claim the costs. However, if you are upgrading your tiles or flooring to increase the value of the house, it doesn’t constitute repair, and cannot be claimed.
Similarly, maintenance refers to the work done for preventing future damage to the property so that you can continue renting it out. It includes essential work like plumbing but not changing the fitments in the bathroom for aesthetic purposes.
You can claim the cost of hiring a professional pest controller if you paid for it.
Renting out your investment property is like managing a business. Therefore, stationery, phone and internet charges related to the management of your investment property can be claimed as a deduction.
Having an insurance policy in place is essential to safeguard your wealth. The ATO also lets you claim your rental insurance premium as an investment property tax deduction.
3. Negative Gearing
If your property is negatively geared, it means that your mortgage repayments and rental expenses are more than your rental income. However, this short term loss is tax-deductible, which can help in maintaining the cash flow. As a result, some property investors use negative gearing as a strategy to maximise their tax savings. They rely on future capital gains, after the property is sold, to offset their loss.
On the other hand, a positively geared property is one where income exceeds expenses, making it viable as a passive source of income. The only drawback is that your rental income is taxable.
As your property gets older, its structure, as well as the equipment inside, wears out. This general wear and tear results in depreciation or reduction in the value of the property. If you are an investment property owner, you can claim this depreciation on your residential rental properties as a tax deduction.
You can claim depreciation under two categories, capital works and plant and equipment assets.
Capital Works Depreciation
You could claim an investment property tax deduction for capital works depreciation if the construction of your rental property commenced after 16 September 1987. The cost of renovating your rental property can also be claimed over the years. Generally, you can claim 2.5 per cent of your property’s construction cost annually, for 40 years from the time it was built.
So, if Eric spent $400,000 in 2010 to build an investment property, he can claim an annual investment property tax deduction for capital works depreciation amounting to $10,000, until 2050.
Plant and Equipment Depreciation
Plant and equipment depreciation covers the wear and tear on fixtures and fittings in the house, like carpets, showers, oven, etc.
You may consider hiring a quantity surveyor to prepare a depreciation schedule for your investment property to maximise your returns. The best part is that you can also claim the fees paid to a quantity surveyor as an investment property tax deduction.
What Can You Not Claim As An Investment Property Tax Deduction?
The following expenses are not eligible for tax deductions by the ATO:
- The repayments of the principal sum borrowed for an investment property.
- Any costs incurred through the personal use of the property.
- Any legal expenses relating to the sale and purchase of the property.
- Stamp duty fee for transferring the property on your name.
- Travel expenses relating to your rental property are no longer deductible unless you are an excluded entity or in the business of letting rental properties.
Getting Started With Your Property Portfolio
Whether you are a seasoned investor or a first time home buyer, a broker can make your investment journey smoother by suggesting competitive investment loan deals. At Wealthy You, we help you in all aspects of financing your investment property. From competitive interest rates to proper portfolio planning for delaying the financial brick wall, we’d be glad to work with you to help you achieve your investment goals. Visit our website to learn more about our service or call us directly (02) 7900-3288 to have a confidential discussion regarding your investment property loan. We will do our best to facilitate your investment journey with our prompt and meticulous service.