What’s Tax Deductible and What’s Not For Property Investors?
Navigating the world of tax deductible expenses for investment properties can be intricate. But with the right insights, property investors can optimise their rental income and confidently manage the landscape.
This guide offers a deep dive into tax deductible expenses, ensuring you’re equipped to make informed decisions and claim deductions.
Essential Tax Deductions for Rental Property Business
When overseeing a rental property, you must recognise the various expenses that you can claim as deductions. These tax deductions work in your favour and can substantially reduce your taxable income, leading to big savings when approached correctly.
Let’s look at some ways you can save next tax season.
Immediate Tax Deduction for Rental Income
1. Property Management and Maintenance
- Advertising Costs: Deductible expenses when you advertise for tenants, either directly or via an agent
- Body Corporate and Strata Fees: Regular charges linked to residential properties within an apartment block or townhouse complex
- Cleaning and Gardening: Essential rental expenses like cleaning, lawn mowing, and pest control
- Security: Deductions related to security patrols or surveillance for your rental property
2. Rates, Taxes, and Rental Expenses
- Water Rates: Deductible for both charges and usage
- Council Rates: Regular fees paid to local councils
- Land Tax: Vital for first-time owners – this is a state based tax so ensure you lodge an initial land tax return for the income year. YOU have to initiate this; they will not chase you up, but they will charge additional interest for late lodgement.
3. Agent and Other Related Expenses
- Fees and Commissions: Including GST
- Administrative Costs: Stationary, postage, and other related expenses tied to property management
- Legal Expenses: Deductions related to debt collection or tenant disputes
4. Repairs, Maintenance, and Capital Expenses
The Australian Taxation Office (ATO) is quite particular about ensuring you understand the differences between repairs and capital expenses. Repairs restore functionality and offer an immediate deduction, while capital expenses are typically depreciated over time.
- Examples of Repairs: Fixing broken glass or electrical faults
- Capital Expenses: These are depreciated (see discussion below). For example, enhancing a property’s structure
5. Interest and Loan Deductions
If you’ve secured a loan for your investment property, the interest and associated fees are tax deductible.
However, the loan must target an income-producing asset, such as a rental property. You can’t claim interest on your main residence’s home loan if you’re not generating income from it.
Deductions on Taxable Income Over Several Years
1. Borrowing Expenses
For loans with terms less than five years, borrowing expenses are deductible over its lifetime. For extended loans, these are deductible over five years. These expenses include:
- Loan application fees
- Lenders’ legal fees
- Title search fees
- Mortgage registration fees
- Lenders mortgage insurance
- Mortgage registration fees
2. Depreciation and Capital Allowances
Depreciation is a tax deduction that property investors can claim for the wear and tear on their property over time. As a property gets older, its structure, fixtures, and fittings naturally deteriorate.
The ATO allows property investors to claim this decrease in value as a tax deduction against their taxable income. This deduction can significantly enhance an investor’s cash flow and is one of the most substantial tax advantages of investing in property.
There are two main types of expenses that you can claim:
- Plant and equipment: this refers to items within the property that are expected to decrease in value over their useful lives. These items include appliances, carpets, blinds, and furniture. The ATO has determined the effective life of many common plant and equipment assets, which dictates the rate at which they can be depreciated each year.
- Building Construction (Capital Works Deduction): also known as capital allowances, this pertains to the depreciation of the actual building structure. It covers the construction costs of the building itself, such as concrete and brickwork. For residential properties, the building can generally be depreciated at a rate of 2.5% per year over 40 years, starting from the date of construction completion. However, it’s essential to note that not all properties are eligible; the property must have been built after a specific date to qualify for the capital works deduction.
To maximise these deductions, property investors often engage quantity surveyors to prepare a comprehensive depreciation schedule. This schedule outlines all the claimable items in the property and their respective depreciation rates, ensuring that the investor doesn’t miss out on any potential deductions.
Non-Deductible and Private Purposes Expenses
Certain expenses aren’t tax deductible or are viewed as capital or private in nature. These include:
- Purchase price
- Stamp duty on purchase
- Legal fees during purchase or sale
- Pest inspections
- Renovations (form part of cost base, reducing the capital gain on the sale)
- Expenses for properties not available for rent
- Expenses incurred when selling the property, such as legal fees, advertising and agent fees
- Pre-purchase expenses such as travel to inspect the property, attending seminars to learn how to acquire more properties and the cost of reports obtained prior to purchasing the property
Other Considerations When Claiming Investment Property Tax Deductions
Beyond knowing what deductions you can and can’t claim when you pay tax, there are a few other considerations you need to keep in mind when claiming tax deductions for your investment property.
Documentation: Streamlining Tax Returns
With today’s technology, it is easy to capture and store most of your information electronically. So, make sure you have either old-style paper or electronic images of all receipts and invoices that might relate to a tax deduction. It makes evaluating the information and processing the return so much easier, taking less time to figure out your work-related expenses.
Audit insurance can be invaluable for managing costs linked to ATO audits. This tax-deductible insurance covers fees when liaising with the ATO.
Capital Gains Tax (CGT) Insights
With rising property values, many investors are reevaluating their portfolios. Whether subdividing land, transferring properties, or seeking creative solutions, understanding CGT implications is important because it can impact your bottom line.
Proper planning can help minimise CGT and amplify returns and our team can help you with these situations, including:
- e.g.,Subdividing and selling the vacant land
- Subdividing and constructing a rental property
- Exiting private arrangements, e.g., family members financing while ownership is in another’s name
- Creative solutions to maintain the main residence exemption
- Maximising sales on subdividing and selling out of pre-1985 property
- Holding onto pre-1985 property, especially when situated in a great location and owned by a trust
- Transferring from parent to children while parent moves to retirement home
- Correctly calculating capital gains tax and maximising exemptions
- Accessing concessions such as the 50% CGT discount
- Property owned overseas, occupied as a main residence and returning to Australia
- Selling or purchasing property owned overseas
- Non-residents and the main residence exemption
- How to establish a property as a main residence to obtain CGT exemptions
Merging Tax and Financial Planning
Tax planning should be an integral component of your overarching financial strategy. Collaborating with licenced financial planners can enrich your tax planning endeavours, ensuring you’re well-prepared come tax time.
By staying informed and proactive, property investors can adeptly navigate the tax landscape, ensuring maximum returns on their investments.
Need Expert Advice on Your Property and Tax Decisions?
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen as legal, tax, or investment advice. You should, where necessary, seek your own advice for any legal, tax, or investment issues raised in your affairs.