3 Types of Investment Property Tax Deductions in Australia
Investing in property can be a great way to build wealth and secure your financial future. However, it’s crucial to understand the costs and expenses involved in any investment. In Australia, one of the significant benefits of owning an investment property is the tax deductions available to property investors. These deductions can help reduce taxable income and increase cash flow, making property investment an attractive option for many investors.
In this article, we will explore the top investment property tax deductions that Australian investors can claim to maximize their returns and minimize their tax liabilities.
There are three main categories of rental property tax deductions:
- Expenses Claimed in The Same Year
- Expenses Claimed Over Time
- Amounts Claimed After Selling The Property
Let’s dive into each of these categories.
1. Expenses Claimed in The Same Year
Interest on the mortgage
You may claim a tax deduction for any interest charged on the mortgage you obtained to purchase or improve your rental property. This is typically the most significant property tax deduction you can claim.
It’s important to note that you won’t be able to claim the interest charged on the portion of the mortgage that you refinanced for personal purposes. This includes using the funds for a family holiday or a new car.
Let’s say you’ve refinanced your mortgage and used part of the funds for personal expenses. In this case, you can only claim a tax deduction for the interest charged on the portion of the mortgage used for investment purposes.
Investment Loan Fees
Investment loan fees, such as application fees, annual fees, and valuation fees, are generally tax deductible in Australia. However, they must be related to earning investment income. To claim such a deduction, you must have taken out the loan to purchase an income-producing asset. This can include shares, property, or managed funds.
Administration and Property Maintenance Fees
Phone and internet used for property management
You can claim any expenses that you have incurred for phone and internet usage when managing your investment property. This includes the cost of calls and data used in communicating with tenants, property managers, and contractors.
Advertising costs
You may claim a tax deduction for any expenses incurred for advertising your investment property. It can include online ads, newspaper ads, or flyers.
Pest Control
You may have incurred expenses for pest control services such as termite inspection, fumigation, and rodent control. You can claim them as a tax deduction.
Garden and Pool Maintenance
You can claim a tax deduction for expenses related to garden and pool maintenance services.
Security Patrol Costs
Any expenses you have incurred for security patrol services can be claimed as a tax deduction. An example could be the cost of hiring security guards to patrol the investment property.
Property Agent Costs
You may claim a tax deduction for any expenses of a property agent managing your investment property. This includes the cost of advertising, leasing, and managing the property.
Account Keeping Costs
Expenses for maintaining records, bookkeeping, and accounting services related to your investment property can be claimed as a tax deduction.
Repairing Costs
The repairs and maintenance must be carried out to fix existing damage or deterioration, and to restore the property to its original condition. It can include repairs such as such as repairs to the roof, gutters, plumbing, electrical wiring, and other fixtures and fittings.
It’s important to keep in mind that replacing an old piece of equipment with a new one does not qualify as maintenance or repairs. Therefore, you cannot claim the cost of a new piece of equipment as an expense. For instance, you chose to replace a broken air conditioner with a new one rather than repairing the existing unit. In this instance, you cannot claim the cost of the new air conditioner as a maintenance or repair expense.
Property Fees
Body Corporate Fees
Any fees paid to a body corporate for services such as maintenance of common areas, building insurance, and administration can be claimed as a tax deduction.
Strata Title Fees
You may claim a tax deduction for any fees paid for the maintenance of common property in a strata-titled property. The strata fee is what you contribute to maintain certain areas of the property. These fees might include garden maintenance, which is NOT eligible to be claimed as a property tax deduction.
Water Rates
You can claim a tax deduction for the water usage, supply, and sewerage charges for your investment property.
Council Rates
Any expenses you have incurred for council rates on your investment property can be claimed as a tax deduction. Suppose you rented out your property for 200 days in a year, then the amount you can claim for the council rates you paid during the year will be based on those 200 days. This corresponds to 54.8% of the total council rates you paid for the year.
Land Tax
You can claim any land tax paid on your investment property as a tax deduction. In general, land tax is a state-based tax that is imposed on the owners of land or property. The timing for claiming land tax varies from state to state.
Here’s a quick overview of the land tax year in each state of Australia:
- New South Wales (NSW): 1 January to 31 December
- Victoria (VIC): 1 January to 31 December
- Queensland (QLD): 1 July to 30 June
- Western Australia (WA): 1 July to 30 June
- South Australia (SA): 1 July to 30 June
- Tasmania (TAS): 1 January to 31 December.
- Australian Capital Territory (ACT): 1 July to 30 June
- Northern Territory (NT): The Northern Territory does not have a land tax.
It’s important to note that the rules and regulations surrounding land tax can change, so it’s always a good idea to check with your local state revenue office for the most up-to-date information.
Insurance
Building Insurance
You may claim a tax deduction for any insurance premiums paid for insuring the building against damages, theft, and natural disasters.
Contents Insurance
Any insurance premiums paid for insuring the contents of your investment property against damages and theft can be claimed as a tax deduction.
Public Liability Insurance
Expenses for public liability insurance, which covers against public liability claims that may arise from your investment property, can be claimed as a tax deduction.
Landlords Insurance
You can claim a tax deduction for any insurance premiums paid for insuring against loss of rental income, damage to your investment property, and legal expenses. This is known as landlords insurance.
Building Inspection
Before you purchase an investment property, it’s recommended to get a building inspection done to identify any potential issues with the property. You can claim the cost of a building inspection as a tax deduction in the year it’s paid. For example, if you paid $500 for a building inspection in the 2022 income year, you can claim a $500 tax deduction in your tax return for the 2022 financial year.
2. Expenses Claimed Over Time
Depreciation of the Building and Capital Items
As an investment property owner in Australia, you can claim a tax deduction for the depreciation of the building and capital items. For properties built after 16 September 1987, you can claim a depreciation deduction of 2.5% annually for 40 years. Structural renovations completed after 27 February 1992 also qualify for a depreciation deduction.
Let’s say you purchased an investment property for $500,000, and the building portion of the property is valued at $400,000. Based on the 2.5% depreciation rate, you can claim $10,000 in depreciation deductions per year for 40 years.
So, in the first year, you could claim a deduction of $10,000 for the building depreciation. If your annual rental income was $25,000, your taxable rental income would be reduced to $15,000. This means you would pay less tax on your rental income, which can significantly benefit investment property owners.
Note that this is a simplified example, and other factors could affect your depreciation claim. Speaking with a qualified tax professional for personalized advice on your investment property tax deductions is important.
However, note that you can only claim depreciation for periods that the property was rented or available for rent. Additionally, you can claim depreciation on the asset’s purchase price over its “effective life” for capital items like air conditioners, washing machines, and dishwashers.
Other Claims
Loan Setup Fees
When taking out a loan for an investment property, you may face various fees such as application, establishment, and ongoing fees. Fortunately, such fees are tax deductible. The savings can add up to a significant amount over the life of the loan.
Valuation Fees
When buying or refinancing an investment property, you may need to pay for a property valuation to determine its value and the loan amount. Valuation fees can be significant and are tax deductible as long as they are accurately documented.
Broker Fees
The fees paid to brokers for arranging an investment property loan, including application, loan origination, and ongoing fees, can be claimed as a tax deduction, subject to accurate records being maintained.
Solicitor Fees
The legal advice and services provided by solicitors for an investment property loan, such as reviewing loan documents, providing legal advice, and attending to settlement, are tax deductible, subject to them being accurately documented.
Note that all of these fees must be directly related to earning rental income to be claimed as a deduction.
3. Amounts Claimed After Selling The Property
Sale and Purchase Amounts
When you purchase an investment property, you may need to pay certain fees, such as stamp duty and registration fees. These costs can be added to the cost base of the property, which can reduce the capital gains tax payable when the property is sold. Similarly, when you sell an investment property, the costs associated with the sale, such as advertising and real estate agent fees, can be deducted from the sale proceeds to reduce the capital gains tax liability.
For example, if you purchased an investment property for $500,000 and paid $20,000 in stamp duty and registration fees, the cost base of the property is $520,000. If you sell the property for $700,000 and pay $35,000 in real estate agent fees and advertising costs, the capital gain will be calculated as $700,000 minus $520,000 minus $35,000, which is $145,000.
Legal Costs for Sale
When you sell an investment property, you may incur legal costs, such as conveyancing fees and settlement fees. These costs can be claimed as tax deductions as long as they are directly related to the sale of the property. Keep accurate records of these costs to claim the deduction in the relevant year.
Frequently Asked Questions
One effective strategy is to claim all relevant costs such as depreciation, renovation, and repair expenses. It’s also important to keep detailed records of all expenses and seek the advice of a tax professional to ensure that all deductions are claimed correctly.
One option is to utilize the main residence exemption by moving into the rental property and treating it as your primary residence. This can lead to a partial exemption from capital gains tax.
The six-year rule allows you to treat a rental property as your main residence for up to six years, as long as you are earning an income from the property through rent. This can help you avoid capital gains tax on the property during that time.
Negative gearing is a tax strategy where you borrow money to invest in a property and the expenses associated with owning the property exceed the rental income. This loss can be used to reduce your taxable income, resulting in a lower tax bill. However, it’s important to remember that negative gearing is a long-term investment strategy and should not be used as a short-term tax benefit.
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