When you own an investment property, working out what tax deductions you can claim can seem confusing.
In this article, we explain how tax works for property investors and what investment property tax deductions you can claim so you can maximise your tax savings.
How does tax work for property investors?
Property investors will need to declare any rental income, losses and deductions in their personal tax return.
If you own an investment property, you can only claim tax deductions for periods when the property was rented out or was genuinely available for rent.
If your property is vacant, it can still genuinely be available for rent, meaning you can still receive tax benefits for your property.
You’ll need to take steps to demonstrate that the property was genuinely available for rent. This could look like:
Marketing the property where potential tenants could find it (e.g. a real estate rental listings website)
Ensuring the rent is a reasonable amount
Making sure the rental conditions are appropriate.
You also can’t claim any deductions for personal use of the property – a period of the year where you stayed in the property, for example. You’ll need to apportion the deductions accordingly, and only claim expenses for income-producing activities.
The same applies if you only rent out part of the property – for example, if you rent out a granny flat and you live in the main house. You can only claim deductions for expenses that relate to the part of the property you rented out.
You also can’t claim any deductions on personal expenses, as with any other tax deduction.
What are the deductions investors can claim on their property?
Claiming tax deductions on your investment property can save you money at tax time.
Here are some of the tax deductions you may be able to claim on your investment property.
1. Home loan interest
If you’ve taken out an investment home loan to finance your property, you can claim the interest portion of your loan repayments as a tax deduction.
Other home loan borrowing costs you could be able to claim include establishment fees, lenders mortgage insurance and valuation fees.
Importantly, you won’t be able to claim a deduction on any portion of the loan used for personal purposes. So, if you refinance the loan to get cash out, you can’t claim the interest on this portion as a tax deduction.
2. Maintenance and repairs
A maintenance or repairs expense is one that maintains the property, but doesn’t improve it.
For example, you might replace some cracked tiles in the bathroom and claim this expense as repairs in your tax return. Or, you might re-oil the deck and claim this as a maintenance expense.
But if you replace the shower recess with a new one to try and improve the value of the property, for example, this would be categorised as a capital expenditure.
3. Capital expenditure
Capital expenditure deductions fall into a few categories:
Initial repairs: these are repairs that you undertake for damage that existed when the property was bought
Capital works: these include renovating, replacing an entire structure that is partly damaged and adding a new structure to the property
Depreciating asset: this is when you install a new appliance, or a new floor or window covering like blinds.
For example, you might add a carport to the property and claim this as a capital works deduction.
For depreciating assets, you will typically need to have a quantity surveyor draw up a depreciation schedule for the property’s assets when you purchase the property itself.
Working out the depreciation of assets can be complicated – see the Australian Tax Office (ATO) website for further information.
4. Property management costs
Do you use the services of a property manager or real estate agent to help run your investment property? You can claim the cost of these services as a tax deduction.
You can also claim the cost of advertising the property to prospective tenants.
5. Property expenses
There are a host of expenses relating to the property itself you can claim, including:
Pest control
Garden maintenance and lawn mowing
Council rates
Land tax
Body corporate fees, if your property is on a strata title.
6. Administration costs
You can claim administration costs associated with your investment property, such as:
Bookkeeping expenses
Stationery and phone costs
Legal expenses, for example if you need to go take court action for loss of rental income
7. Insurance
If you purchase insurance for your investment property, you can claim the cost as a tax deduction.
You’ll need to have a record of the cost of your insurance premium, including:
Building insurance
Contents insurance
Public liability insurance
Landlord’s insurance.
8. Negative gearing
While not a deduction so to speak, negative gearing can be financially beneficial for some property investors.
Negative gearing is when your investment property costs more than your rental income and you take a loss.
You can offset this loss against any other income you have to reduce the tax you’ll pay.
It’s important to note there are restrictions that come with negative gearing. It could be best to speak with a qualified accountant or tax adviser about negative gearing to ensure you do it correctly.
9. Capital gains tax discount
Again, although the capital gains tax discount is not exactly a tax deduction, it is still a way to potentially save money on your tax return.
If you sell your investment property and make a profit (that is, the difference between what it cost you to buy and improve the property, and the amount you sold it for), this is called a capital gain.
You need to pay tax on your capital gain if you bought and sold your property within 12 months.
However, if it’s been 12 months since you sold your property, you’re eligible for a capital gains discount of 50%.
What will you need to claim tax deductions?
For any tax deductions you want to claim on your investment property, the ATO requires proof. This means you’ll need documentation to support the deductions you claim.
It could also be useful to seek help from a tax professional. Getting advice from an expert can ensure you don’t make any mistakes and make the most of your tax time savings.
Do you have a question about your investment loan? Your local Aussie Broker is here to help. Simply book an appointment at a time that suits you.