Considering interest rates are dropping to the lowest levels we have seen in years, along with a still booming house market. An investment property is a very tempting proposition for many taxpayers. Especially when it comes to tax benefits.
A landlord can have multiple ways to reduce their annual tax bill. And these deductions are often the difference between a negative cash flow and a positive one.
A key point to note is that investors can only claim deductions on their property. During periods in which it was tenanted or genuinely available for rent. And they can only claim a portion of an expense that was used for business purposes. And also must keep records to prove these expenses.
Here are the top tax deductions for investment properties.
Rental Advertising Costs
Landlords need to find tenants or re-let properties and do so through a range of advertising.
If you market your property using online, print media, brochures, and signs, you can claim these advertising expenses against your income. But only in the same year that you paid for them.
Loan Interest
Investors can claim the interest charged on a loan for an investment property and any bank fees for servicing that loan.
For example, if you incur $20,000 interest on your loan. And $200 in loan fees, you can claim these on your personal tax return. You can’t, however, claim your repayments on the principal sum. And you can’t claim interest on the entire size of the loan. As you refinanced a portion of the loan for private purposes. Regardless of whether equity in an investment property was used as security in that loan.
Council Rates
Rates can be deducted in the year that they are paid, although you can only claim them during periods in which the house was rented.
For example, if your investment property was only rented for 180 days of the year, then you can only claim your rates for that period. This means you would claim 49.3% (180/365) of the total amount you paid in council rates for your investment property that year.
Land Tax
If you have a rented dwelling on your investment property, you can use land tax as a deduction.
However, the levy differs significantly between states. As does the timing of when you can claim the cost. Consult your local tax agent at R T Accounting & Taxation Services to ensure you are claiming the correct amount in the right year.
Strata Fees
If your property is on a strata title, you can claim the cost of body corporate fees.
But if the fee includes maintenance and garden expenses, you cannot claim these expenses separately.
Building Depreciation
Depending on when your investment property was built, you may be able to claim a deduction. But only on the depreciation of the building’s structure. And any renovations you make to the property.
If the property was built before 16 September 1987, you won’t be able to claim depreciation on the original construction costs. If it was built after that date, you can claim a depreciation deduction on these costs of 2.5% a year for 40 years. This would mean that, if the building were built for $100,000 in 1990, you could claim a depreciation deduction of $2,500 a year until 2030.
Similarly, you can’t claim depreciation deductions on renovations that took place before 27 February 1992. But you can claim depreciation deductions on structural improvements that took place after this date, at a rate of 2.5% for 40 years.
As always, though, you can only claim deductions for the period in which the property was rented or available for rent.
Appliance Depreciation
When offering a rental, landlords often install dishwashers, washing machines, air conditioners, stoves, and other assets.
Just like the building itself, these appliances decline in value. And landlords can claim this depreciation over several years, usually in line with each asset’s “effective life”.
However, landlords can only claim depreciation on assets when they meet certain criteria.
You can only claim deductions on both brand-new and second-hand depreciating assets in residential rental properties. If you bought the property before 7:30 pm on 9 May 2017 and installed the asset before 1 July 2017. Otherwise, you can only claim depreciation on an asset’s purchase price. If the asset was brand-new, or if no one had previously claimed depreciation on the asset. Because the property was either newly constructed or recently significantly renovated.
Repairs & Maintenance
You can claim repairs as an immediate deduction if they relate directly to wear and tear. Which is to say, if you replace a few broken roof tiles after a storm or repair an appliance, you can claim the costs of hiring a professional to make these repairs as an immediate deduction. But if you replace an appliance, you will need to claim this cost as a depreciation deduction, over the course of the asset’s lifespan.
Similarly, you replace an old fence or install new carpets purely in a bid to increase the value of the property. Then you will need to claim these costs as a capital works deduction, at 2.5% a year for 40 years.
Pest Control
Depending on who paid for the service, the tenant or the landlord can claim an immediate deduction for the cost of hiring a professional pest controller.
Garden and Maintenance
Property owners can claim the maintenance and replacement of plants and structures as an immediate deduction. However, you can not immediately deduct the cost of any new plants or changes that add extra value to the property. These are deemed as “improvements” and must be depreciated accordingly.
Insurance
You can claim the cost of insuring a rental property. Your provider should be able to give you an annual breakdown of the cost.
Bookkeeping Costs
The numbers can become confusing with property investments. So most landlords have an accountant.
You can claim the costs of advice, preparation of tax returns. And also expense incurred for management of your rental accounts in the same year the costs were incurred.
Be aware, that you cannot claim a deduction against your rental property for the cost of preparing your personal tax return. However, you can submit this as a write off when doing your own income statement for the year.
Agent Fees
Fees or commissions paid to agents who collect rent, find tenants and maintain your rental property are tax-deductible.
Travel Costs
A mum and dad property investor can no longer claim the costs of travel to inspect a rental property or carry out repairs.
The exceptions to this rule are excluded entities. And landlords who are carrying on a business of property investing.
For example, John owns several rental properties through his Self-Managed Super Fund (SMSF). He regularly travels to the homes to conduct repairs and do the garden. John cannot claim travel expenses for this.
Legal Expenses
Costs for legal advice and documents that relate to rental activities are tax-deductible.
For example, if you are evicting a tenant or going to court over unpaid rent, then you can claim the costs of doing so. As well as the costs of preparing all relevant legal documents.
Under the current government, investors can offset any losses they make on an investment property against their assessable income. This is to say, if an investment property’s rental income is less than its expenses, the landlord can deduct this loss from their taxable income. So that they pay less property tax.
Capital Gains Discount
Finally, if you make a capital gain on the sale of your investment property, you need to pay property tax on this profit.
If you bought and sold your property within 12 months, your net capital gain is simply added to your taxable income. Which, in turn, increases the amount of income tax you pay.
However, if you held onto the property for more than a year before selling it, you’re eligible for a capital gains discount of 50%. This means you only need to incorporate half of the capital gain into your personal tax return.
This information is of a general nature only and does not constitute professional advice on the property tax. You should always seek professional advice in relation to your circumstances before acting.