Property investment is a big step to your financial freedom. You can increase your cash flow and at the same time, take advantage of the tax-deductible expenses on your rental property.
Several costs associated with the ownership and operation of the investment property are claimable in the financial year the expenses were incurred. Examples of the top property rental costs are the following: depreciation, interest repayments, property management fees, council rates, and more.
Capital expenses are the only types of costs you couldn’t claim for. These are the basic costs for owning the investment property like the cost of the building and land as well as pest inspections done before the exchange of contract and stamp duty. Once the property is sold, these costs are assessed in the calculation of the cost base to determine the Capital Gains Tax or CGT.
If the property is still new, you may find that the rental property costs are more than the income you earn from your rental property. As it is resulting to a net rental loss, this means that your property is ‘negatively geared’. The overall loss made on your investment property can be used to lessen your other assessable taxable income, like your salary, which translates to lower taxes.
Generally, you will need to furnish the relevant records to claim deductions. Note that they are only claimable for the periods when you are earning rental income from your rented-out property.
Here are the tax deductions available for investment properties. Find out what tax savings you could be missing out on.
- Home Mortgage Interest
This is significant savings difficult to miss. Any interest aside from your investment loan is tax-deductible. Remember that your accompanying fees for maintenance costs of a home loan can be claimed to balance out the account fees as well.
On the other hand, you are not eligible to claim interest on any part of the loan for private purposes. An example is when you take out refinancing to have some cash as an initial payment for a new vehicle.
- Negative gearing
Negative gearing for an investment property means the investor’s loan repayments, as well as rental expenses, are higher than their income from the rent. Such losses (though short-term in nature) are generally tax-deductible.
For this reason, most perceptive investors will deliberately place their property in a negative gearing situation to fully capitalise on their tax savings. The investors expect that the losses will make up for the capital gains in the future once the property is sold when it has significantly increased its value.
Positive gearing is the opposite of the effect of negative gearing. It’s when the income from your rent is higher than your rental property expenses, thus, giving you a good (positive) cash flow. This is quite important as you start to build up your passive income, although the unfavorable effect is that you pay more tax due to higher taxable income.
- Repairs and maintenance
Repairs and maintenance are deductible but should not be mixed up with a different subject, property improvements.
If you are doing repairs, your goal is about restoring a broken part or feature to its original state. For instance, to claim repairs for a damaged window, you must get the same or similar materials the original window was made of. The costs of a professional doing the repairs can also be claimed as an immediate deduction. Note that once you use improved or enhanced materials to repair this window, it would likely be classified as a type of improvement that will warrant a different treatment by the ATO.
So, what does maintenance mean? It is the type of work completed to keep the property in a “rentable state” and at the same time prevent future damages. Standard plumbing work is an example of maintenance.
Check out “Crunching the Numbers: Positive Cash Flow vs. Negative Gearing“
- Depreciating assets
There’s a good probability that you’ll take up property improvements as a landlord. This could mean the simple installations of new fixtures/appliances, major renovations, or both.
You will most likely claim them as depreciation or capital works deductions in the long run as you’re not eligible to claim them instantly. Depreciation tax claims refer to the wear and tear as well as the reduction in your property’s value in terms of assets or structures.
- Advertising
You will have to allocate a portion of your budget for marketing or advertising the property to search for the right tenants. Do not worry as all these expenses can be deducted. Other fees include the costs you incur in putting up or listing in websites, brochures or flyers, and print advertising expenses.
- Property management and agent fees
You hire and pay for a property manager for your rental property if you don’t want to do it yourself. A property manager’s responsibilities include taking care of the property by running it daily, checking and resolving inquiries and concerns from tenants, and collecting rental payments. This property management work is usually offered by real estate agencies and such fees are tax-deductible.
- Strata
You are obliged to pay strata fees when the investment property you have is a townhouse or unit on a strata title. Body corporate charges due on investment property on a strata title are tax-deductible.
- Insurance
As a rental property investor, perhaps, you might have these types of insurance assigned to your property:
- Public liability
- Building
- Contents
You might also own income protection insurance as a good strategy when a huge portion of your personal income’s source is also your rental income. Any appropriate insurance payment you make is claimable as another tax deduction.
- Various probable deductions
Other potential tax deductions that you can claim:
- Land tax
- Some Legal fees
- Cleaning
- Gardening and mowing lawns
- Electricity, gas, and water bills
- Council rates
- Lenders Mortgage Insurance (LMI)
- Property management and agency fees
- Pest control expenses
- Writing & office materials
- Other travel costs
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Other key things to note:
Tax incentives are often designed in complex ways and can be quite confusing at times. We suggest you seek the help of a professional if you are unsure with your calculations to avoid double take up of tax deductions. For instance, you should not claim garden maintenance costs on top of strata fees if this type of maintenance expense is already covered in the strata. Such appropriate advice, as well as advice that can help you legally maximize tax savings specific to your personal situation can be provided by a competent tax accountant.
If you are keen to know more about tax deduction policies, you may refer to the ATO website. You could also directly inquire with the ATO for any clarifications regarding the information you have read. Arming yourself with as much information could help you take advantage of all the tax opportunities available on your investment property.
REPAIRS vs IMPROVEMENTS
Are investment property repairs considered tax-deductible?
YES- the repairs done in your investment properties are considered tax-deductible. But most investors are typically confused about repairs vs. improvements.
Claims on repairs for a property are handled differently vs. improvements to avoid any problems in working out your tax processes each year.
Let’s check more in detail how Repairs and Improvements vary from each other:
REPAIRS
When you talk of repairs, it suggests that you’re bringing a thing back to its original condition or function. One example could be replacing chipped wooden tiles. Repairs are treated as tax deductions as long as the guidelines are met.
For the ATO to consider the work done as a repair, you must bring back the damaged feature to its original state before it was damaged. For instance, if you need to repair a portion of your carpet, you have to make use of the same type of material that it had before the repair.
If it turns out that you are replacing the damaged carpet with wooden floors to improve the property and increase its value – this would be considered as an improvement, thus cannot be claimed against repair and maintenance costs.
Similarly, this would apply if you buy the latest model of an appliance to replace the old/broken one. Normally, once you change or replace items in your property, this is not considered a repair, but you can claim depreciation or capital works deduction.
IMPROVEMENTS
There is another way of handling your investment property’s improvements.
How do you define improvement? It is a kind of modification done to a property to increase its worth and appeal. Once you’ve entirely changed the structure and character of the item in your property on which works are being carried out, that’s an improvement. A good example will be repairing a sofa but using more durable and pricier materials vs. the original. Note that you are not eligible to do tax claims for total costs of improvement made at the time of execution, but still, there are other ways to reduce your tax for years in the future.
You can be eligible in claiming depreciation of the wear and tear of most features in your rental property. You can also claim deductions for capital works over several years for the expenses incurred in your major renovations.
Are rental property maintenance expenses considered tax-deductible?
Just to clarify – repairs and maintenance are quite different. Maintenance is work that’s carried out to ensure that future damages are prevented while keeping the property in good working status or appearance. Maintenance includes garden maintenance and plumbing work.
More examples are indicated below:
- Cleaning
- Garden upkeep (includes lawn mowing)
- Routine plumbing work
- Re-oiling a wooden type of deck
- Repainting of faded walls inside the house
Maintenance Expenses are typically tax-deductible and claimable under Repair and Maintenance on your rental schedule.
Are initial repairs tax-deductible?
When you do repairs to damages already existing on your property when you purchased it – these are taken as initial repairs and cannot be claimed for immediate tax deduction.
Generally, initial repairs may be included in the cost base of your rental property Capital Gains tax calculation.
Documentation needed:
The ATO is inclined to check thoroughly tax deductions for all investment properties for rent. As you submit your tax claims — include in detail all carefully prepared documentation relating to the following:
- Total Expenses for Property Purchase;
- Data about Home Loan;
- Income from the Rent;
- Other deductible expenses you made.
- Organizing your rental property taxes for the first time can be all-consuming. And that’s totally understandable! It may be worthwhile to ask for assistance and support from an accountant with solid experience in rental property depreciation and taxes.
