Property investment deductibles and depreciation: What you need to know

What can you deduct on an investment property?

Munzurul Khan: Look, there are many things ... There are some very standard, common deductibility … There are some of the deductibility which, perhaps, one needs to know … [then there are] areas that, perhaps, you should not go. So, it's a yes as well as no.

What are the general deductibilities?

Munzurul Khan: The general deductibility is that, naturally, you have your investment property, you've got your interest, so your interest is deductible. All of your running costs are deductible, [including] ...council rates ... water rates … [and] insurance. You might do a little bit of repairs and maintenance and that's deductible [as well], depending on whether it's repairs and maintenance, or ... a capital improvement. If you buy an asset, it can be depreciated, but if it is more of a repair, you can claim that [a deductible].

Any other expenses which are assessed—as long as you can justify any other expenses that are absolutely, directly attributable, and ... reasonable—are deductible.

Are there more complicated parts of identifying deductibles?

Munzurul Khan: One potential tricky [part] that one needs to be aware of … is that when you buy a new investment property, as part of the purchase ... there is a Solicitous Settlement Adjustment.

What is a Solicitous Settlement Adjustment?

Munzurul Khan: Let's just say ... that you're buying a property right now, today in September, and the vendor had happened to pay the council rate for 12 months in advance. What the solicitor does [is] an adjustment, saying that, "Well, the council rate [is at] $1200 but the vendor should really only be paying for July and August, and he should be paying all the rest of the 10 months." So, on that example, you actually pay $1000 out of the $1200 back to the vendor as part of your Solicitor Settlement Adjustment.

That's a common thing that people miss … because that's been taken as part of the adjustment of the purchase and, sometimes, we ... don't see that we actually paid it. So make sure that you speak to your Accountant and that gets claimed.

Can similar adjustments apply on other rates?

Munzurul Khan: Similar adjustments could be in terms of your water rates ... insurance … land tax [and a] whole lot of things—any level of prepayment that the vendor has made.

Are there other deductibles that property investors often miss?

Munzurul Khan: The other thing that we, at times, sort of miss are the borrowing cost. So [if] I financed over 80%, as an example, and I pay the Lenders Mortgage Insurance, that's deductible over five years … even if it is capitalised because, while it has been capitalised, the view is that you have paid it, and you have borrowed it again. It is definitely being over five years as well.

It's not only the Lenders Mortgage Insurance [that serves] as a borrowing cost claim over five years. There's a whole lot of other borrowing costs ... which are associated in terms of your getting the loan—things such as you might have done a building report, you might have done a pest report, you might have done a strata report ... All of those are claimable over five years. You may have paid an application fee, and that loan application fee is deductible.

Then, maybe, [you] stamped along the way. In some states … some mortgages stamp is needed [and] that's claimable as well. All of [these] borrowing costs are claimable.

Can you claim a deduction for a buyer’s agency fee?

Munzurul Khan: Buying agency services is sort of becoming a lot more privacy ... so [it is a question of whether your] buyer’s agents are just purely buying that property on behalf of you or are the buyer’s agents also doing a review of your portfolio—sort of project managing in terms of some level of construction, renovation, repairs needed to be done, or finding an accountant [and] a solicitor.

One may argue that if they are being segregated ... I suppose the cost involved with all of those individual services, a portion of it may be claimable up front. [However], if there is no segregation, everything becomes capital.

On the other hand, which expenses are not deductible?

Munzurul Khan: The travel expense has been taken away … so you can't claim any deduction for you to visit, inspect, [or] travel to a property … That's the rule … that came in on Budget Night in 2017. Prior to that, you still could, but from the Budget Night onwards, you could not.

How has depreciation changed after Budget Night?

Munzurul Khan: There's no change [in] the building depreciation. [Take note that] depreciation has two things—one is the skeleton, which is the building, then you've got plant and equipment. So the budget has changed, saying: The building, you can still claim it ... but the plant and equipment, unless you pay for it, you can't claim it … Anything which you may have incurred by yourself ... you can claim it.

What are some of the most important reminders you have for property investors?

Munzurul Khan: You have to be a little bit careful—what's the purpose of the borrowing? Borrowing [could be your] biggest [pitfall].

One of the other pitfalls is, you've got a line of credit, and line of credit sometimes gets mixed in between your private use as well as the business use. If it gets too much mixed, then you really can't segregate your business [and] we're just raising everything as non-deductible.

Phil Tarrant: It can get quite complicated [so it] harkens back to having a good accountant ... good depreciation schedules … scrapping reports and whatnot when you need it … Make sure that what you do is the right thing to do and make sure you have evidence to support it.

Tune in to Munzurul Khan’s new episode on The Smart Property Investment Show to know which structure is best to buy in, how the ownership of a property works when referring to names, the risks associated with having two names on a mortgage and title, as well as the right balance of LVR, the ins and outs of diversification, and the right time to invest into other asset clouds.