Investment Property Tax Tips: What You Can and Can’t Claim

January 10, 2021
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With the end of the financial year fast approaching, it’s important to maximise the legitimate tax deductions for your investment property. Your rental income is assessable for tax purposes as soon as your receive a rent payment, so you should know about investment tax.

To learn how much tax on rental income you’ll be charged, determine the rent income you have generated. The Australian Taxation Office (ATO) generally enforces rules on property owners’ appropriate tax deductions for rental-related income such as bond returns, insurance payouts, booking expenses, and tenant-paid repair costs. More so, you need to understand what you can and can’t claim.

Here’s a simple guide to help you get started and when you’re ready, you can move on to our ATO rental property guide for a full rundown of tax obligations.

What you can claim

The costs and expenses you can claim for your investment property tax may seem pretty obvious. However, most property owners aren’t aware of the in-depth details as to the differences, meaning, and suitable application of certain fees and expenses. Hence, property owners should be aware of these things.

Tax-deductible expenses on investment properties can generally be grouped in four categories:

  1. Borrowing expenses
  2. Property management costs
  3. Repairs and maintenance costs
  4. Depreciation

Your borrowing expenses

The major borrowing cost for your investment property will usually be the interest on the loan you used to buy it or to finance renovations or major repairs.

There can also be associated borrowing expenses besides interest, such as:

  • Loan establishment fees
  • Ongoing loan fees
  • Mortgage broker fees
  • The cost of preparing and filing mortgage documents (e.g. by a solicitor)
  • Lenders mortgage insurance

Your property management costs

Investment Property Tax Tips

Investment property management costs can include expenses such as:

  • Advertising for tenants
  • Council rates
  • Insurance
  • Property management fees
  • Accounting/tax agent fees
  • Land tax
  • Body corporate fees and charges (for units/apartments)

Your repair and maintenance costs

Investment property expenses are considered repairs if they involve a replacement or renewal of a broken or worn out part while (or after) the property is rented to tenants. For example, replacing the following items:

  • Damaged guttering
  • Broken light fittings, tiles or windows
  • Electrical appliances or machinery
  • Tap washers and fittings

Maintenance is preventing or fixing deterioration. For example:

  • Painting
  • Cleaning
  • Gardening and lawn mowing
  • Pest control

Based on the list of maintenance activities above, you can claim the cost of pest control services performed by service providers such as Pest Ex Pest Control in Brisbane or another pest control company. The same is true with cleaning, painting, and landscaping services. Keep the receipts and a copy of the contract agreement for documentation when filing investment property tax.

If your investment property is a unit or apartment, repairs and maintenance costs usually come out of a common fund that you contribute to. You can claim the amount of your contribution for any such expenses that arise.

It’s important to note that if you receive an insurance payout for the cost of any repairs, you must include this amount as income in your tax return, along with claiming the associated tax deductions.

Investment Property Tax Tips

It’s also important to understand the difference between repairs and maintenance costs and renovations/improvements. Examples of renovations/improvements include:

  • A new kitchen, bathroom or extension
  • Adding or removing an internal wall
  • Adding a carport, driveway, fence or retaining wall

Renovations/improvements are classed as capital improvements for an investment property and are treated as capital works expenditure. Unlike repairs and maintenance costs, renovation/improvement expenses cannot be claimed as full tax deductions in the financial year that they occur.

Instead, 2.5 per cent of these costs can be claimed each year for 40 years from the date the construction is completed, provided the property remains available for rent.

Plant and equipment depreciation

If you purchased your investment property before the 9th of May 2017, you can claim depreciation for plant and equipment assets. If purchased after this date, you can only claim for plant and equipment if you installed these new assets yourself, or if the property was brand new when you bought it (not second hand).

A depreciating asset is defined by the Australian Taxation Office as being one that has limited life expectancy and can reasonably be expected to decline in value over the time it is used. They are standalone functional units that are generally not fixed to the property.

Examples of investment property assets that you could depreciate include:

  • Furniture
  • Air conditioners, heaters and solar hot water systems
  • Solar panels (however any rebate you receive for installing these panels would need to be included in your assessable income)
  • Kitchen and laundry appliances
  • Carpets
  • Curtains

The full depreciation on an asset costing $300 or less can be depreciated in its first year of use. However, the depreciation on assets with a value over $300 must be claimed over the asset’s estimated useful life.

What you can’t claim

Investment Property Tax Tips

While it’s important to understand all the expenses you can claim so you can legally minimise your tax bill, you also need to understand the ones you can’t claim. These include:

  • The purchase price of the property (including government stamp duty costs and building inspection costs). However, these costs form part of the cost base of the property when calculating your capital gains tax (CGT) obligations if/when you sell it in the future.
  • Any expenses that are paid by your tenants (like electricity or gas charges).
  • Travel to your investment property (e.g. to inspect it, collect rent or perform maintenance), unless you are carrying on a property investing business. It’s important to note that this expense was an allowable tax deduction prior to the 2017/18 financial year, but it is no longer available
  • Any expenses relating to your personal use of the property. For example, if you used your investment property yourself for a holiday for part of the year, you would need to allocate (and not claim) a portion of your total expenses to reflect this private use period.

Hire A Professional To Boost Your Claim

Real estate accounting is one surefire way to determine what you can claim. You can hire the services of an in-house accountant or an accounting firm to handle this job. There could be tax deductibles that you’re unfamiliar with, but which could save you a lot of money. You can use the tax savings for another investment or pay the salary of a certified public accountant for your peace of mind.  

A professional accounting service company employs experienced real estate accounting experts to do complex calculations and analyses for you. That way, you’ll be knowledgeable and up to date on the best accounting practices for your realty business.

However, make sure to research several providers and create a shortlist. Many accounting agencies offer outsourcing services for small and medium-sized businesses. Ensure you deal with a trusted firm to guarantee your data privacy.

Narrow down your options by interviewing a representative from each of your prospective accounting service firms. Learn more about how they do their tax computation and bases for claims for the type of business you have. That way, you can maximise your claim, as well as learn new tax concepts and related knowledge and skills from true accounting experts, which you can apply yourself in the future.

Wrapping Up

With this article, you are more or less equipped with more information to file your income property taxes. You know the investment property expenses that you can and can’t claim. 

So, track all your business expenses and transactions, such as repairs, maintenance, and equipment purchases. And most importantly, consider consulting a tax professional to obtain practical advice, check your records for comparison purposes, and ensure legal compliance.

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