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Maximising investment property tax deductions
August 2023
Key takeaways
- Understanding the available investment property tax deductions in Australia is essential if you are to maximise the financial benefits of property investment. By taking advantage of deductions, investors can significantly reduce their tax liability.
- One of the most significant tax deductions available to Australian property investors is the ability to claim interest expenses and loan costs associated with financing their investment property.
- The Australian Taxation Office (ATO) allows property investors to claim tax deductions for the depreciation of both the building structure and the assets within the property.
Investing in real estate has long been a popular choice for Australians seeking to build wealth and secure their financial future. Apart from potential capital gains and rental income, investment property owners in Australia can also benefit from various tax deductions. These deductions can significantly reduce the tax liability associated with owning and operating an investment property.
Here, we have outlined the key mechanisms available to investment property owners in Australia to help maximising deductions.
Loan interest expenses and associated loan fees
One of the most significant investment property tax deductions available to Australian property investors is the ability to claim interest expenses and loan costs associated with financing their investment property. This deduction applies to the interest paid on the loan used to purchase or maintain the property. Additionally, costs such as loan establishment fees, mortgage broker fees, and refinancing costs can also be claimed.
- Deductible mortgage interest - Property investors can claim a tax deduction for the interest paid on their investment property loan. The interest can be claimed as an expense against the rental income received.
- Loan establishment fees - Expenses incurred in establishing a loan, such as loan application fees and lender's mortgage insurance (LMI), can be claimed as a deduction over five years or the term of the loan, whichever is shorter.
- Refinancing costs - Refinancing investment property loans to secure a better interest rate or improve the property, costs such as exit fees, valuation fees, and legal fees can be claimed as a deduction over five years or the term of the loan.
It is important to note that deductions for interest expenses are only applicable to the portion of the loan used for investment purposes. If the loan is for a combination of personal and investment purposes, the interest deduction should be apportioned accordingly.
Depreciation
The Australian Taxation Office (ATO) allows property investors to claim tax deductions for the depreciation of both the building structure (capital works deduction) and the assets within the property (plant and equipment deduction, which includes items such as dishwashers, fridges, and air conditioning units).
To help maximise depreciation deductions, engaging a qualified quantity surveyor who can prepare a depreciation schedule can be helpful. This schedule will outline the depreciable value of each asset and provide a detailed breakdown of the deductions available over the lifespan of the property. By claiming depreciation, investors can offset the costs associated with the gradual deterioration of their property against their taxable income.
- Capital works deduction - Property investors can claim a deduction for the cost of construction or renovation of the building structure (capital works) over a period of 25 or 40 years, depending on the construction commencement date.
- Plant and equipment depreciation - Items within the property that have a limited effective life - such as appliances, carpets, and blinds - can be depreciated and claimed as a deduction. However, this now only applies to new items, after changes to the legislation in 2017 restricted the ability to claim depreciation on second-hand plant and equipment items.
Repairs and maintenance
Investment property owners can deduct expenses incurred for repairs and maintenance of their property. These expenses include plumbing repairs, electrical work, painting, and general upkeep to ensure the property is in a habitable condition for tenants. The costs associated with pest control and prevention measures, such as termite treatments, can also be claimed as a deduction.
Note that whilst expenses for repairs and maintenance are deductible, improvements and renovations are not. Keeping accurate records of all repair and maintenance expenses is essential as evidence that those costs correspond to the amount being claimed, and as proof that the works actually took place, if subsequently requested by the ATO.
Property management fees
Engaging a property manager to handle the day-to-day operations of an investment property is common among landlords. The fees paid to property management companies or agents are fully deductible. These fees cover tasks such as tenant selection, rent collection, property inspections, and dealing with maintenance requests. By outsourcing property management, investors can save time and also benefit from a tax deduction for these associated costs.
Insurance premiums
Insurance is a vital component of property investment, providing protection against potential risks such as fire, theft, or damage caused by natural disasters. The premiums paid for landlord insurance, building insurance, and contents insurance are all tax-deductible.
Council rates and land tax
Council rates cover the cost of local services such as rubbish collection and disposal, street maintenance, and public lighting. Land tax is a state-based tax on the value of land that exceeds a certain threshold.
Council rates and land tax are obligatory payments that property owners must make, but both payments are deductible.
Strata fees
Strata fees can be included as part of your overall property expenses when calculating your taxable rental income. These fees are considered a legitimate expense associated with owning and renting out the property.
It's important to note that strata fees can only be claimed for the portion that relates to the investment property itself. If the property is used for personal purposes, a deduction can only be claimed for the portion that is attributable to the income-producing use.
Additionally, accurate records must be kept of the strata fees paid, as well as any other associated expenses, to support a claim.
Advertising and marketing costs
When looking for new tenants, property owners often incur advertising and marketing costs to promote their rental property. These expenses - including online listings, newspaper advertisements, and signage - are generally tax-deductible. Again, it is essential to keep a record of these expenses to claim them accurately when lodging tax returns, and for evidence in the event of an audit.
Capital Gains Tax (CGT) concessions
When selling an investment property, there are potential CGT concessions available for holding the property for more than 12 months, such as the 50 percent discount on capital gains or the ability to defer the CGT by reinvesting in another qualifying property.
Negative gearing
Negative gearing is a tax strategy that allows investors to claim investment property tax deductions for any losses incurred from owning an investment property.
The concept of negative gearing applies when the expenses associated with the property, such as mortgage interest payments, property management fees, maintenance costs, and insurance, exceed the rental income generated by the property. The tax deduction can be applied against your other assessable income, like salary or wages.
Understanding the available tax deductions for investment properties in Australia is essential if you are to maximise the financial benefits of property investment. By taking advantage of deductions, investors can significantly reduce their tax liability.
To ensure compliance, as well as to ensuring that all eligible deductions are being claimed, it is recommended that investors consult a qualified tax professional or accountant who specialises in property investment. They can provide personalised advice based on an investors specific circumstance and help navigate the complex regulatory landscape.
By adopting a proactive approach and maintaining accurate records of all expenses, investment property owners can optimise their tax position and enhance the overall returns of their investment property portfolio.
Note: the ATO will now receive data direct from insurers and banks to confirm landlord insurance premiums and loan interest payments. It’s therefore critical to keep accurate records of all your expenses.
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Taxation law is complex, and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice.
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