The tax obligations of a property investor are different from someone in an owner-occupied home.
As a property investor, some of the expenses of owning the property are tax-deductible. Let’s go over which ones are and how you can maximise your tax benefits.
What Tax Deductions Can You Claim On An Investment Property?
The investment property tax deductions you can claim can be divided into two broad categories:
|Tax Deductions You Can Claim In The Same Year You Paid Them||Tax Deductions You Can Claim Over Time|
Repairs and maintenance
Interest on loans
Gas, water and electricity
|Loan set-up fees
Renovation or improvement
Depreciation of capital assets
Investment Property Tax Deductions You Can Claim Each Year
When you rent out your property, you are liable for expenses related to it. These expenses can be claimed as tax deductions the year you incur them.
- Advertising costs: These include the cost of buying online and offline advertising to find the right tenant.
- Loan interest: You are entitled to claim tax deductions for any interest charged on your investment loan. You cannot claim deductions on principal loan repayments. This is why property investors favour interest-only loans, as they can deduct full repayments during the interest-only periods.
- Council rates: During periods when the investment property was rented or available for rent, council rates can be deducted in the year they were paid. You cannot claim rates if your tenant is paying for them.
- Utilities: If you paid for water, electricity or gas, you can claim a deduction.
- Rental agent fees: If you used the services of an agent to find a tenant, you can claim these expenses during the year you paid them.
- Legal expenses: If you sought legal assistance to prepare rental documents or legal counsel to evict a tenant, the cost can be deducted.
- Insurance: landlord insurance is a tax-deductible expense; it covers tenant-related risks like the loss of rental income and damage by tenants to your property and its contents.
- Pest control: If you hired a pest controller, the cost is tax-deductible.
- Land tax: As long as your investment property is rented out, land tax can be claimed as a tax deduction.
- Tax adviser services: If you used a tax adviser, you can claim the fees as a deduction.
- Repairs and maintenance: You can claim deductions for wear and tear and for any damages that happened when the property was rented out. This does not include improvements made to the property like landscaping.
- Negative gearing: A rental property is negatively geared when the expenses are more than the income you earn from it, resulting in a net rental loss. You can deduct the full amount of the loss from your taxable income.
Investment Property Tax Deductions You Claim Over Time
The investment property tax deductions you can claim over multiple years are divided into three categories:
1. Borrowing expenses
2. Depreciation of assets
3. Capital works
Borrowing expenses include fees incurred when you take out an investment loan, like establishment fees, mortgage broker fees, title search fees, etc. If the borrowing expenses are less than $100, you can claim deductions in the income year they occurred.
You can also claim tax deductions for asset depreciation. The write-off of the asset is done over several years. The types of assets you can write off include tools and machines, kitchen appliances air-conditioning units and more. You can only claim depreciation for the asset if it was used to earn income.
You can claim capital works deductions on the cost of any construction for an investment property, any improvements done on the property, including additions of retaining walls and embankments for environmental protection. Other examples of capital works expenses that can be deducted include adding a room, removing an internal wall and any structural improvements.
Investment Property Tax Deductions You Cannot Claim
As property investors, it is important to know what fees and costs cannot be claimed as tax deductions, too:
- You cannot claim expenses that your tenants paid (water rates, gas and electricity bills, etc).
- You cannot claim expenses that you can’t prove with a bank statement, invoice or receipt.
- You cannot claim deductions if the property was not rented out or genuinely available for rent.
- You cannot claim repayments on the principal amount you borrowed to buy an investment property.
- You cannot claim solicitor or conveyancer fees related to the purchase and sale of a property.
Frequently Asked Questions
Can I Claim Deductions For The Cost Of Holding Land?
No, you cannot claim deductions for the cost of holding vacant land as a property investor. The ATO states that the land is considered vacant when:
- There is no substantial permanent structure
- There are ongoing renovations on a substantial structure, during which it cannot be rented or occupied.
There are some exceptions to this. Visit the ATO’s website for more information.
How Do I Claim Deductions On Investment Property?
The ATO is cracking down on tax returns and going through documents with a fine-toothed comb looking for incorrect claims. Do not make any fraudulent or misleading claims on your return, as this is illegal and can lead to huge fines and more.
If you cannot prove the deduction, do not claim it. That’s why it’s important to keep all the relevant invoices, receipts, bank statements and proof of advertisements in rental listings.
- Keep a record of rental income and expenses for at least five years.
- These records can be either physical or digital.
If you’re in doubt, contact the ATO or a qualified accountant so you can minimise the taxes on your investment portfolio.
Is The Interest On A Home Equity Loan Tax Deductible For Rental Property?
No. You cannot claim for borrowing costs if you’ve borrowed against the equity for personal use.
Is Investment Property Tax Deductible?
Yes, you can claim tax deductions on related expenses if the property is rented out or is genuinely available for rent. These deductions can be claimed either immediately (against your current year’s taxable income) or over a number of years.
Is Stamp Duty A Tax Deduction On An Investment Property?
No, you cannot claim a deduction for the cost of stamp duty on your investment property.
How Do I Avoid Paying CGT On Rental Property?
When you sell an investment property, you either make a capital gain or incur a capital loss. Capital gains tax (CGT) applies to investment properties bought after 19 September 1985. A capital gain is when the proceeds from the sale of the property are more than the cost of owning the property. On the other hand, a capital loss is when the cost of owning the property is more than the proceeds from the sale of the property.
The sale of your family home or principal place of residence is usually tax-free. However, for the sale of an investment property, capital gains tax is applicable.
CGT applies to the property on the date you sign the contract of sale. You must declare the profit or loss from the sale on your tax return in the year it took place.
While an investment property is not exempt from CGT, you can minimse the amount you pay. If you hold your investment property for more than 12 months, you pay CGT on only half of the gross capital gain.
How Does Negative Gearing Work?
Negative gearing is when the costs of your investment property, plus any interest you pay, is more than the rental income you’re making during the year. Property investors favour negative gearing as a strategy because the net loss is deductible from their taxable income.
You will have to pay taxes on your rental income if your investment property is positively geared.
How Do I Maximise My Tax Return With An Investment Property?
- Remember to claim deductions for depreciation. As it is a non-cash deduction, many property investors miss out on this one.
- As the ATO considers rental income taxable income, make sure you claim the expenses of owning the home, to reduce the taxable amount.
- Know the difference between repairs and improvements, as they are taxed differently. Repairs and maintenance can be claimed in the year they were done; with improvements and renovations, you can claim deductions as they depreciate over time.
- Get the help and advice of a Quantity Surveyor to make sure depreciation is calculated properly.
- You can amend your previous years’ tax returns if you’’ve missed any deductions.
There are many advantages of owning an investment property, and tax benefits are just one of them. If you are interested in buying your first investment property or building a portfolio, get an expert mortgage broker onto your team.
At Home Loan Experts, our mortgage brokers are also seasoned investors, so we understand your needs. From getting you approved for finance to maximising your profits, we’re here to help. Call us on 1300 889 743 or fill in our free assessment form today.