As accountants, the old saying "a penny saved is a penny earned" is one of our guiding principles, and it should be the same for every property investor.
If you own an investment property in Australia, maximising the tax deductions you have available can make a big difference in the overall success of your venture. But whilst these deductions can keep your budget stable and your cash flow healthy, the rules surrounding them can be complicated.
In this country, there are numerous incentives to encourage consumers to invest in the property market, especially for rental income purposes. So, if your property is rented out on an ongoing basis, these are the tax deductions that you should be taking full advantage of.
What deductions can I claim for my investment property?
Mortgage Interest and Borrowing Expenses
As a property investor in Australia, you may be eligible to claim a tax deduction on the interest you pay on your investment loan.
This tax benefit applies to any property that generates taxable income (ie: rental income). Additionally, any loans acquired for costs such as renovations, repairs, or maintenance for your rental property are also eligible for an interest deduction.
Importantly, you can also claim for a whole range of other ‘borrowing expenses’ that are associated with buying a property.
Not included in borrowing expenses:
- The amount you borrow for the property
- Loan balances
- Principal repayments
- Stamp duty charged by your state
- Legal expenses
What is included as borrowing expenses:
- Loan establishment fees
- Lender’s Mortgage Insurance
- Title search fees
- Stamp duty charged on the mortgage
- Bank and legal fees
- Valuation fees
For a complete list of the hidden costs involved with buying property, check out a recent video of ours here.
If these your total borrowing expenses exceed $100, the deduction is spread over the first five years of the loan.
If you have a principal and interest loan, you'll need to calculate the interest component of your loan repayments each year before claiming the deduction. Be sure to consult with your accountant to ensure you're claiming the correct amount and maximising your tax benefits as a property investor.
Rental Property Expenses
As the owner of a rental property, you can claim a range of expenses associated with maintaining and operating your rental property.
These can include costs for the following expenses:
- Advertising
- Body Corporate Fees
- Cleaning
- Council Rates & Land Tax
- Depreciation
- Insurance
- Water Charges
- Agents Fees
- Mortgage Interest
- Repairs & Maintenance
It's essential to keep detailed records of all of these expenses, including receipts and invoices, so that you can take full advantage of the tax deductions available to you. If you're unsure about how to claim home improvement expenses on your investment property, it's always a good idea to consult with a tax professional for tailored advice.
However, it's important to understand that not all rental property expenses are created equal.
The rules surrounding repairs and maintenance costs are complicated and these expenses can be taxed differently. We’ll explain more about deductions related to repairs and maintenance below.
Additionally, purchases for depreciating assets that cost more than $300 (such as carpets, air conditioners and flooring) must be claimed under their rate of depreciation. Other costs such as renovations or restorations are considered 'capital works expenses' and also cannot be claimed immediately. We’ll also expand on depreciation later in the article.
Repairs, Maintenance & Capital Expenditure
Ongoing fixes and maintenance can be a headache for property investors, both in terms of your time and your wallet.
If you have incurred costs associated with repairing or improving your rental property, it is crucial to understand how you can claim a deduction on these expenses.
Using the ATO’s guide, here is a summary of the different categories your expense may fall into.
- If you’re replacing something that is worn out, damaged or broken as a result of renting out the property, it is likely considered a repair which can receive a full tax deduction.
- If you’re preventing or fixing the deterioration of an item that occurred while renting out the property, it is likely considered maintenance which can receive a full tax deduction.
- If you’re repairing damage that existed when the property was bought, it will likely be classified as an initial repair which should be claimed as either Capital Works or Capital Allowances (see depreciation).
- If you’re replacing an entire structure that is only partly damaged or renovating or adding a new structure to the property, this will likely be considered Capital Works, which should be claimed under its depreciation rate.
- If you’re installing a brand new appliance or floor/window covering (costing over $300), this will likely be considered a Depreciating Asset, which should be claimed under its depreciation rate.
Before you make a claim, make sure you categorise the expense correctly to receive the appropriate tax benefit. For more information on how you can claim repairs, maintenance and capital expenditure, visit the ATO website or speak to one of our accounting team.
Depreciation
Understanding all of the rules surrounding depreciation can be enormously helpful for maximising the potential tax savings for your investment property.
As your rental property ages, the wear and tear on its structures, materials, and assets will lead to a decrease in value. Fortunately, Australian tax laws allow rental property owners to claim this decline in value as a tax deduction. These deductions, known as depreciation deductions, are divided into two categories.
The first category of depreciation deductions is known as Capital Works and covers expenses related to structural improvements, renovations, and extensions. This can include the property's overall structure, as well as fixed items like fences, doors, toilet bowls, bathtubs, and more. Generally, owners can claim a deduction for these expenses at a rate of 2.5% per year for up to 40 years, however, other rates may apply. To claim depreciation on the building itself, the ATO requires your property to have been built after 1985.
The second category of depreciation is for Depreciating Assets, also known as 'plant and equipment’ depreciation, and applies to easily removable fixtures and fittings within the property. These include items that are not structurally integral to the building itself but may add to the property’s rental value, such as carpets, air conditioners, appliances, blinds and ceiling fans. To help with this, a quantity surveyor can prepare a report that creates a depreciation schedule for these claims when a rental property is purchased. This report can be used to determine the depreciation rate for each item, making it easier for owners to claim their deductions accurately.
As you can see, the rules and criteria surrounding claiming for depreciation can get quite complicated, and there are a lot of details we haven’t included, so make sure you first speak to your accountant or tax professional before making a claim.
If you’re wanting to make the most of the tax deductions available to you, our accountants will be able to identify all the possible strategies that can minimise your tax bill. Additionally, if you'd like more information on the tax deductions discussed in this article, you can visit the ATO website.
