Tax deductions for property investment - a checklist

Firstly, you need to be aware what you can actually claim. It sounds simple, but if you start listing them now it’s likely you either think something can be, when it cannot, or there are items that you aren’t claiming that could be helping your investment to perform better.

Research your tax obligations and claimable expenses – ask your accountant and, when in doubt, call the tax office. There are a number of lists and discussions online, and a number of blogs anda articles on this website about maximising your deductions and when you can claim your interest expenses.

When you’re aware of this basic information, you can start having a closer look at some of the areas that investors commonly trip up on.

Are you a co-owner?

If you’re claiming deductions in a co-ownership structure, be wary and ensure you do not claim more than your fair amount.
Principal adviser of Property Tax Specialists, Shukri Barbara, explains that you must legally be dividing the income and expenses for the property in line with your legal interest it it.

“For example, if a husband and wife own a rental property jointly, i.e. 50/50 equity, but only one earns a salary, the interest and loan repayments are made by the sole earner.

“In order for the sole earner to keep with their equity in the property, the maximum interest expense that can be claimed as a deduction will be 50 per cent.

“There will be no tax benefit for the spouse who has not been working that year as they had no income and paid no tax.

“Their losses, on the other hand, can be carried forward and offset against their future year’s income,” Mr Barbara says.

Is it available for rent?

Remember that deductions are only claimable when the property has been available to rent – essentially, when it has been advertised by you or your agent.

The rental status of your property should be a major concern when you are performing maintenance work. Any repairs completed prior to its being deemed available to rent will not be tax deductible and you will miss out on accessing those savings.

While deductions will be subject to your property’s active rental period, don’t stop advertising just because your property is vacant and continues to remain vacant, says Eddie Chung, partner, tax and advisory, property and construction at accountancy BDO.

“The tax deductions you may claim on an investment property will need to be apportioned if the property was not available for rent for some period during the year: for example, if you use the property for private purposes.  

“On the other hand, just because the property was vacant for a while does not mean that the apportionment of expenses is required.  

“As long as the property was available for rent – in that you continued to advertise it – the expenses attributable to the vacant period will remain tax-deductible.”

Is it a repair or an improvement?

This consideration can catch many out when it comes to claims. Do you know what constitutes a repair and what is an improvement? Not all work performed on your property is deductible so this is crucial to identify.

If the work you are performing involves fixing up damage caused by wear and tear, the expense is likely to be a repair and therefore tax deductible.

But when you are replacing old materials with new and enhancing your property beyond its original state, the work is more likely to be considered an improvement and will instead be added to the cost of your property, representing a depreciable asset.

In the case of any major work undertaken on your property, be careful what you claim as a repair as this is an area the Australia Taxation Office (ATO) likes to focus on. Many people get it wrong, according to Dave Naylor, founding partner of Chan and Naylor.

“A word of advice: if the amount is substantial this will more than likely trigger an audit, so seek professional advice beforehand or even contact the ATO themselves directly for a ruling,” he says.