Investing in property comes with risks, rewards and obligations - one of which is fulfilling your tax obligations at the end of the financial year.
To ensure the profitability of your investment, you should try to claim for as many of the costs of owning your rental property. Who doesn't want more money in their pocket, right?
These deductions are essentially any expenses related to your rental property - though you need to know what the Australian Tax Office (ATO) considers a legitimate expense. Working this out can be tricky - but is essential if you want to maximise the profitability of your investment and keep on the right side of the law.
There are resources out there to help you make sense of the current tax regime. The most obvious of these is the ATO website. You can also pay a professional, like a tax agent or accountant, for their advice. Before you do either of these, however, let’s take a quick overview of what you need to know.
Read more: Tax implications of selling property
Tax deductions you can claim on an investment property
There are a range of deductions you can claim on your investment property, but before you get ahead of yourself make sure you qualify on a basic ATO requirement.
"Your property must be rented or available for rent to qualify for any deductions. This means you must either have tenants or be actively advertising your property to let to be eligible to claim."
Assuming you tick this box, you should be able to claim for all or many of the following in the financial year they were incurred:
- Repairs and maintenance to your investment property, though these must ‘make good or remedy defects in, damage to or deterioration of the property’
- Management and maintenance costs, including body corporate fees, council rates, water charges, cleaning, gardening and pest control fees
- Insurance cover for your investment property, including building, landlord and contents insurance
- Interest on your bank loans and borrowing expenses
- Advertising for tenants and property management fees
- Your accountants or tax advisers fees
Other types of expenses need to be claimed over several years.
The most unusual tax deductions for investment properties
There are actually a few of these on the list. The ATO lists 167 depreciable plant and equipment items for residential properties. These range from bins to garden sheds and smoke alarms. What is considered 'plants and equipment' are things that are beyond the home's foundations or bricks and mortar, and that are generally replaced in a short time period.
For example, a new kitchen is considered a part of the premises but its appliances are considered plants and equipment so a portion of the kitchen can theoretically be claimed as depreciation each year.
Another popular (but very dangerous) deduction is travel expenses related to real estate investing business purposes. You'll be fine if you can prove it was an actual business related expense, however, many people get a little cheeky when it comes to this one. They will go on a vacation, look at a couple of investment properties and then write off the trip as a business expense.
Whenever you plan on deducting travel expenses, just know that the ATO want to see lots of evidence to prove that it wasn't a vacation. So, put together as much documentation as you can so that you can show that it was a business trip. This means: meeting with real estate agents in the area, keeping records of email correspondence and getting everything in writing regarding proerties that you visit, as well as tracking mileage for driving done between rental properties.
Please note: that under the ATOs new legislation, you are no longer able to claim any deductions for the cost of travel you incur relating to a residential rental property unless you are carrying on a business of property investing or are an excluded entity.
Expenses claimable over several years
Other expenses - such as any major renovations - are classed as capital improvements by the ATO, and should be claimed as capital works deductions. This is worked out on a sliding scale, based on the age of your property - so it can often be complicated to calculate.
You can also claim for the decline in value of certain fixed items in your investment property - including appliances, carpets and furniture - called depreciating assets. And in addition to all these, you can also claim for the fees and costs associated with your investment loan - called borrowing expenses.
Because this is a fairly complex area of tax law, you are likely to need to consult the ATO guide for depreciating assets, and/or get advice from a tax professional.
Tax deductions you can’t claim on an investment property
"You also need to know what you can’t claim on your investment property. These include stamp duty, legal expenses and insurance premiums that benefit you personally."
If for example, you rent your investment property out for part of the year and live in for the rest of the time, you cannot claim interest paid on the mortgage for the whole year. As you can see the law does change - so you may need to get advice on what applies when you submit your tax return.
Does negative gearing impact my tax status?
If your property is negatively geared it means you make a loss on the rental, i.e. when your expenses exceed the income you receive from your tenants. Here the ATO is very clear, and states: ‘You may be able to claim a deduction for the full amount of rental expenses against your rental and other income’ – and pay less income tax.
What about capital gains tax?
If you sell your investment property, you are likely to be liable to pay capital gains tax (CGT). This government tax applies if you make any profit from the sale of an investment property.
The ATO allows you to offset costs like stamp duty, any legal fees and estate agent’s commission to reduce your profit - and therefore your tax obligation.
Getting help and tax advice
Unless you are clear on all aspects of tax law and how it applies to an investment property, we highly recommend getting professional advice. This could either be at the outset or on an ongoing basis.
Working with an accountant or tax professional will help you understand the law and how it applies to you. They can also help you claim as many deductions as possible - which all adds up to more cash in your pocket.
When doing your taxes, be sure to always keep in mind, tax laws do change, sometimes every year - so seeking professional advice will help you claim everything you are entitled to. For more information, the ATO has a ton of online resources to help you understand your tax status.