INVESTMENT PROPERTY TAX DEDUCTIONS

Buying a investment property is an exciting investment, but to make the most of it, you also need to understand how to maximise the tax benefits.

What are the tax advantages of an investment property?

Close to 2 million Australians own a rental property, which is seen as a stepping stone toward financial freedom. One of the attractions is the huge tax benefits.

Landlords can offset any losses on their rental property against their income. If the income generated by a property is less than the expense of owning it, then these costs can be deducted from the owner’s income. This means paying less tax, something we all want to do.

What other kinds of expenses are claimable?

Nearly all expenses associated with owning an investment property are tax deductible. This is important as it allows the property to be negatively geared.

Some of the items that can be claimed include advertising costs to find a tenant, land tax, council rates, strata fees, pest control, repairs and maintenance, garden maintenance, insurance, agent fees, stationery, phone calls and legal expenses. You can even claim the interest paid on your mortgage. Expenses can only be claimed for the period during which a property was leased.

Record keeping is important at tax time

Bookkeeping is also a claimable expense for property investors. You will need to keep a meticulous record of every single cost associated with your investment property. Agents managing your property can assist you with this. It will also make it easier when it comes to selling, as capital gains tax may apply.

How is rental income calculated?

All income received from renting out a property must be declared whether this is paid directly into your bank account, or to your real estate agent.

Is interest paid on investment property tax-deductible?

One of the biggest deductions for investors is the interest on money borrowed to buy the rental property or carry out repairs and renovations. Properties are only eligible if they have been rented or are available to be leased in that financial year.

It is important to remember that interest cannot be claimed if any proportion of the loan was used for personal reasons, such as buying a new car or going on a holiday. It must strictly be only used for the investment property. Most investors to use an interest-only loan to maximise their deductions.

What is rental depreciation?

Landlords can also claim deductions for the 'wear and tear' of items within their investment property. Depreciating assets include carpets, curtains, kitchen appliances, air-conditioning and hot water systems. These are separately identifiable items, not part of the structure, not likely to be permanent and expected to be replaced within a relatively short period.

Changes introduced 2017 mean that depreciation on such assets can only be made if it was purchased brand new, or if it is in a newly built or substantially renovated property.

Claim depreciation cannot be made on second-hand items. So, if you move into the property for a period before renting it out, you won’t be able to claim items as they will be seen as previously used.

The Australian Taxation Office has determined what is known as the 'effective life' of such items and how much can be claimed. For example, carpets are considered to have a lifespan of 10 years. Property investors can also come up with reasonable estimates but must show records of how this was worked out.

If an asset costs less than $300 – such as a heater or toaster – and is not part of a set of assets but was used to help to lease the property, it may be eligible for an immediate deduction.

Get professional advice

No one wants to be hit with a tax bill for over-claiming deductions on a rental property. I highly recommend you seek professional advice from a qualified accountant who can guide you on how to maximise the tax benefits available.

Remember not all deductibles can be paid immediately within the same financial year. If you are leasing the property to a friend for less than the market rate, you can only claim the rental income received. If the investment property is jointly owned, the expenses will need to be divided accordingly.