Investment property tax reductions offer landlords various ways to cut their annual taxes. They could be the difference between staying in the black and a negative cash flow when done right.
What can you claim on an investment property? This question often bogs Australian property owners. They should note that deductions can only be made when the property is leased out and where expenses are for business purposes only.
This article offers sound advice on rental property tax deductions that can reduce your overall expenses. It will help you make your rental investment more profitable.
Eventually, when you sell your investment property, you’ll also need to be aware of the taxes involved with the purchase. To complement this article on tax reductions, you can check out our ATO rental property guide for a full rundown of tax obligations.
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Mortgage interest and fees
Few assets can match a rental property in terms of acquisition costs. You might need the help of a lending company to buy the property. The lending company will expect repayments to service the loan every month.
An example is given of a Victoria property owner who incurs a $1000 interest and an additional $150 as loan fees. The owner can claim these as part of their personal tax return. This, however, does not apply to the mortgage repayments made every month.
Rates paid to council
Property owners are required to pay rates to the municipality or council. This fee meets the cost of providing services by the council and the maintenance of amenities. This includes green spaces, local roads, and street lights in the neighborhood.
To claim council rates paid in your annual return, you must have leased out your space for the whole year. How much will a landlord who has only rented their space for 270 days claim? Divide 270/ 365. They can only claim approximately 74% of the rates paid.
Advertising and marketing fees
Only through property marketing will potential tenants know of your vacancy. There are various tested and proven advertising methods. Some landlords may choose traditional methods, such as printing brochures and signs. You can also choose to use MLS websites and listings.
Regardless of the method, Australian property owners can claim these expenses as investment property tax reductions. You should note that you can only claim these expenses in the same year they were incurred.
Building depreciation
Depreciation can be defined as the loss of property value due to the effects of normal wear and tear. Property owners can claim depreciation of the construction costs at a rate of 2.5% per year for the next 40 years.
The rate quoted above also applies to renovations made on the property.
Appliance depreciation
Rental property must provide certain appliances and devices per the State’s property laws. Some of them include boilers, air conditioners, and a stove. Failure to do this gives a tenant certain rights and powers. For instance, a renter can decide to end the lease immediately. All they would need to state is that the required appliances are lacking.
Like buildings, these appliances depreciate and lose value over time. Appliances have an ‘effective life,’ and a landlord can claim depreciation in line with this. However, there are requirements to reduce your annual taxes.
It is possible to claim depreciation of an asset if the appliance is brand-new or when no other owner had claimed the same. This is in the instance where a property owner recently renovated the property.
Property owners can only claim appliance depreciation for the rented period. This also applies to building depreciation.
Repairs and maintenance of the property
Tenants are pretty picky about the condition of the property. Expect calls throughout the lease period to make repairs on the property. You can claim these investment property tax reductions as direct deductions for repairs effected to wear and tear.
The authorities consider replacements to the property as renovations. Property owners will claim replacements under building depreciation.
Landscape and garden maintenance
In the current property market, more renters are working from home. Rental properties with outdoor gardens are ‘hot’ commodities as they are appreciated.
To maintain their landscape, property owners will incur upkeep costs. These maintenance costs can be claimed as a direct deduction. However, this doesn’t apply to changes or extra plants to the property. Such additions improve the property’s value and are categorized as ‘improvements’.
Improvements fall under a different class of tax deductions.
Capital gains tax
Sellers are taxed for any capital gain made from the sale of investment property. If the purchase and sale were within a year, your taxable income increases by the net gain from the sale. This increases your annual income tax.
There is, yet, a disclaimer that you can take advantage of. If the period above exceeds a year, you will only pay 50% of the net capital gain.
Additionally, you should know when your rental income is assessable for tax purposes, which is, once the rent is received.
Professional fees
Real estate is quite the technical field. We appreciate that not every landlord is knowledgeable. They don’t have the expertise and industry knowledge to manage their rental property. You might need the professional advice of experts to guarantee the smooth running of your investments.
Management fees are tax-deductible. This also applies to brokerage or agent fees that you might incur. Suppose you need the advice of a reputable lawyer to deal with a tenant dispute? This also is deductible.
Stationery and phone usage costs
Property investment is like running a business. You will incur costs in stationery, phone contacts, electricity, and internet usage. If you can apportion a cost to this, you can deduct this from your annual tax return.
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