Property Tax Deductions 101: Rental Deductions to Claim

February 15, 2024

Simon Madziar
Simon Madziar

Master Property Tax Deductions: Rental Insights & Strategies

What investment property costs are tax deductible in Australia?

In Australia, tax deductions for investment properties include mortgage interest, property management fees, repairs and maintenance, insurance premiums, council rates, and depreciation of assets. It's important to consult with a tax professional for accurate advice tailored to your specific situation.

Understanding the tax deductions for your investment property can significantly enhance your tax return. Unfortunately, many investors miss out on expense claims because they lack the knowledge provided by the Australian Tax Office (ATO).

Being aware of all the potential tax breaks available to you can make a crucial difference between hoping to earn enough from your investment property and achieving positive cash flow.

To help you maximise your investment property tax deductions, here are some valuable tax tips to equip you with the best strategies.

Discover the Rental Property Deductions You Can Claim!

Depreciation (Division 40)

Just like vehicles, wear and tear on your investment property is inevitable. This can have an impact on the financial value of your property, a phenomenon known as depreciation (Division 40). Fortunately, property investors can benefit from depreciation as it is a rental property deduction. It serves as a non-cash investment property tax deduction that can be claimed gradually and used to offset your taxable income.

Capital Works Depreciation (Division 43)

If your investment property was built after 16 September 1987, you may be eligible for a tax deduction on the depreciation costs of the building.

If you decide to renovate your investment property, the construction costs can also be tax-deductible as a rental property deduction.

However, unlike maintenance expenses, construction costs cannot be fully deducted in the same year they are paid. Instead, you can claim the costs over several years as a Capital Works deduction.

This deduction allows you to claim 2.5% of the construction cost per year for 40 years, starting from the time the property was built. For more information, you can refer to the ATO website.

Plant and Equipment Depreciation (Division 40)

As a homeowner, you can also claim depreciation for the wear and tear on fixtures and fittings in the investment property.

These include items like carpets, cupboards, air conditioning units, ovens, and showers.

Quantity Surveyor Fees

To optimise your investment returns, it may be beneficial to consult with a quantity surveyor. They can assist in creating a depreciation schedule for your investment property, while the added advantage is that the associated fees are tax-deductible for investment properties.

Loan Interest

This is the most significant property tax deduction for your investment that you can claim. If you took out a loan from the bank to purchase your investment property, you have the right to claim any interest charged on the loan as a deduction for your rental property.

Rental Expenses

Renting out your investment property is a great way to generate income. However, as a landlord, it's important to be aware of the various expenses that can be claimed as rental property deductions each year. These expenses are eligible for deduction in the same tax year that you incurred them, making them a valuable aspect of property investment. By understanding and leveraging these deductions, you can maximise the financial benefits of your investment property.

Accounting Fees

The tax-deductibility of accounting fees serves as a compelling incentive to enlist the expertise of an accountant for efficient tax return management and to explore strategies for maximising your tax refund.

Advertising Costs

The cost associated with advertising to find tenants for your property is a tax-deductible expense.

Bank Charges

All bank fees incurred on the loan utilised for acquiring the investment property can be claimed as tax deductions.

Body Corporate Fees

If you own an investment property that is a unit or a townhouse, you will be responsible for paying body corporate fees. These fees encompass building insurance and the upkeep of common areas. Importantly, paying these fees yourself (not the tenant) makes it eligible for an investment property tax deduction.

Cleaning

If your rental agreement with the tenant incorporates a weekly cleaning service, it can be considered as a tax-deductible expense for investment property. Similarly, the cost of thoroughly cleaning the house after the tenant moves out is also eligible for tax deduction.

Council Rates

The expenses mentioned here cover the cost of rubbish collection and street maintenance for the property location. If you are responsible for paying council rates as the property owner, rather than the tenant, you can claim this as a tax deduction for your investment property. It's an opportunity to optimise your tax benefits while ensuring the upkeep of the property.

Gardening Costs

You can claim the expenses for garden maintenance and replacing plants or garden structures on your investment property. However, keep in mind that any landscaping improvements that enhance the property's value cannot be claimed as gardening expenses.

Land Tax

If you have leased your property, you have the right to consider the land tax as a deduction for investment property purposes.

*As each state has its own regulations concerning land tax, consult a tax advisor on how to ensure you are submitting the correct claim in the right year.

Legal Expenses

It is advisable to consider seeking legal aid when it comes to drafting the rental paperwork. Otherwise, you might find yourself in a predicament where you require the guidance of a lawyer to obtain an eviction order. It is worth noting that legal counsel can be claimed as a deduction for investment properties.

Pest Control

Investing in a pest controller to eliminate pests from your property is an essential expense to maintain the rental income from your investment property. This expense qualifies as a rental property deduction, allowing you to claim it as an immediate tax deduction on your annual return.

Property Insurance

Securing rental insurance is a wise choice to safeguard both your property and its valuable contents. Moreover, it's an expense that can be deducted from your taxes.

Rental Agent Fees

If you decide to engage a property agent to oversee the management of your property and foster a positive rapport with your tenants, they will be eligible for a fee typically ranging from 6% to 8%.

Repairs and Maintenance

As long as the work performed on the property is for maintenance purposes rather than improvements, you can claim it as a tax deduction for your investment property.

Examples:

  • Repairs to the heating, ventilation, and air conditioning systems are not just necessary; they’re pivotal for tenant retention and can be deducted for your investment property.
  • Repairing roof leaks, repainting peeling walls, and fixing broken windows
  • Replacing worn-out carpets or fixing damaged floorboards can be classified as repairs and maintenance. However re-carpeting the entire property or replacing the carpet with floor boards is a capital expense even if they are worn out or damaged.

Stationery, Phone, and Internet Costs

Renting out your investment property is akin to running a business. You can claim any expenses for stationery, phone, and internet usage as tax deductions for your investment property, as long as they are directly related to its management.

Tax Advice

If you choose to engage a tax advisor to help you with your land tax claim, the fees for their services can be deducted from your taxes right away.

Utilities

If you are the one responsible for paying the water, electricity, and/or gas, you can consider these expenses as tax deductions for your investment property. However, if you require the tenant to pay for the utilities, you cannot claim them as deductions for your rental property.

Capital Gains Tax (CGT)

If you sell your investment property within 12 months of owning it, you will be required to pay capital gains tax (CGT) on the profit from the sale. However, if you hold the property for more than 12 months before selling, you become eligible for a 50% discount on your CGT. This means that only half of the capital gain needs to be included in your tax return.

What can’t you claim on an investment property?

As per the Australian Taxation Office (ATO), certain expenses cannot be claimed as tax deductions for investment properties. These include:

  • Expenses resulting from personal use of the investment property.
  • Repayments of the principal sum borrowed to acquire the investment property.
  • Solicitor and conveyancer fees associated with property purchase or sale (This forms part of the cost base of the property).
  • Other expenses incurred during the purchase or sale of the investment property (This forms part of the cost base of the property).
  • Stamp duty fees incurred during the transfer of property into your name (This forms part of the cost base of the property).

Key Takeaways

To optimise your tax return, it is crucial to utilise the ATO's comprehensive list of claimable rental property deductions. Equipping yourself with this knowledge will put you in the best position to capitalise on all available tax return opportunities tied to your investment property.

Keep in mind that you must have proof for all the listed expenses in order to claim them as investment property tax deductions. Always ensure that you retain receipts, invoices, and any other relevant documents pertaining to the expenses associated with your income-generating investment property.

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