These deductions can be significant and can often draw the line between a negative cash flow and a positive one.
But a property investor can be confused with these tax deductions, and it can be difficult to understand which tax reliefs you can claim on your property.
To avoid missing out on these financial opportunities, here are the top expenses that are tax-deductible for investment properties.
What are tax-deductible investment property expenses?
If you buy an investment property that you can get an income from, you can claim any expense associated with earning that income. For example, if you decide to rent out your property, the landlord’s insurance on the rental properties you own can be deducted from your taxable income.
However, if your investment property is used for both private and income-generating purposes, you can only claim tax deduction for expenditures that are used to produce income (e.g. rental income). For example, if you have a holiday property or a time-shared unit, you are not entitled to deductions for any expenditure related to periods when you or your immediate family used the house or unit for private purposes.
For landlords, you can only claim for expenses for certain periods when your property is either:
- rented by a tenant
- not leased or occupied by renters but is genuinely available for rent
- the property is advertised to potential tenants
- if tenants are reasonably likely to rent the property (if advertised or publicly stated that it is available for rent)
If these don’t apply, it’s likely that you can’t claim all your expenses as you don’t show any intent that you want to earn income from your property.
Can I still claim tax deductions on negatively geared investment properties?
If your investment property is negatively geared, don’t worry! You can still claim the tax deductions on your property.
An investment property is positively geared if your deductible expenses are smaller than your capital gain from the property. However, the overall tax result of a negatively geared property is a net loss. In this case, you can claim a tax deduction for the full amount of expenses against your income from the property when you do your tax return. If your other income is not sufficient to absorb the loss you incurred, you can carry forward the loss to the next financial year.
Investment property expenses you can claim as tax deduction
To help ensure that you are not missing out on any claims on your next tax return, here are the different investment property expenses that you should take note of:
- Advertising - This includes advertising costs that you have spent when a tenant vacates your rental property and you are looking for a replacement. However, this is only applicable if your property is used for rental purposes.
- Bank fees and charges - Investors can claim the interest charged on a loan for an investment property and any bank fees for servicing that loan.
- Body corporate or strata fees - This expense is claimable if you own a unit or a townhouse and you need to pay for the maintenance of the common areas. Body corporate fees cover building insurance and maintaining common areas, through to shared utilities, building works and repairs.
- Council rates - If you own a property, you are likely due to pay council rates. This includes things like getting the rubbish being collected or street maintenance and other services that you need to pay the council for. Again, this should be a tax-deductible expense for you if your investment property is used for income-generating purposes. Rates can be deducted in the year that they are paid, but you can only claim them during periods in which the house was rented or leased.
- Land tax - This expense is only incurred if you own several properties or own a lot of land within one state. As long as you have rented out your investment property, you can claim land tax as a deduction. The rates are significantly different between states and the period when you can claim the cost are different as well. It’s better to consult a tax adviser or check with the state government department to make sure that you are claiming the right amount in the right year.
- Property agent’s fees and commission - This is another extra cost in your portfolio. Fees or commission paid to property managers or agents who collect rent, locate tenants and maintain your rental are tax-deductible.
- Insurance - You can claim the cost of insuring a rental property. This is considered claimable because you need insurance to cover you (in the case of the property being destroyed or tenants doing damage) to help you have an income. The amount will be based on the annual or quarterly breakdown from your provider.
- Legal expenses - While the legal expenses associated with buying or selling your property are non-tax-deductible, costs for legal counseling to help you maintain a rental property can be claimed. You can also claim the legal cost associated with evicting a non-paying tenant or defending a damages claim regarding injuries suffered by a third party on your rental property. Before claiming this expense, make sure to consult with your accountant if it is applicable in your situation.
- Cleaning - Investment property owners can claim cleaning costs as an expense because it helps in generating an income. This may pertain to expenses for a weekly cleaning service or having a property cleaned up after a tenant moves out.
- Building depreciation - You may be able to claim a tax deduction on the depreciation of the building’s structure, depending on when it was built. Expenses allotted to any renovations you make to the property may also be claimed. If you want to look more into investment property depreciation, read here.
- Repairs and maintenance - You can claim repairs as a tax deduction if they relate directly to wear and tear. This mostly involves repairs or maintenance in your property. However, be careful when claiming this expense because the Australian Taxation Office (ATO) has strict regulations about what you can write off as an immediate deduction. Check the ATO website to see which items can be claimed as a tax expense and what items need to be claimed as depreciable assets.
- Gardening costs - Expenses involved with maintaining the gardens in your investment property are also claimable, according to the ATO. Investment property owners can claim the upkeep and replacement of plants and structures as an immediate tax deduction. However, the cost of any new plants or changes that will add extra value to the investment property are categorised as “improvements” and must be depreciated accordingly.
- Interest expenses - If you take out a home loan to buy a rental or investment property, you are qualified to claim a deduction for the interest charged on the loan, or if not, a portion of the interest. To do this, you must prove that the property is rented out or genuinely available for rent in the income year you filed to claim a deduction.
- Prepaid expenses - This refers to expenses spent on services extending beyond the present income year. It includes payment on an insurance premium on 1 January that gives coverage for the entire calendar year.
- Pest control - You may often need to get someone to come in to spray the house if it starts to get overrun with pests. This is a cost that you incur to keep the rental income coming in, so that should be something that you could claim as a tax depreciation. Depending on who paid for the service, either the tenant or landlord can claim an immediate deduction for the cost of hiring a professional pest controller.
- Capital gains tax discount - If you decide to sell your investment property and make a capital gain on the transaction, you are required to pay tax on the profit. If your property is purchased and sold within 12 months, your net capital gain is added to your taxable income, which also increases the amount of income tax you pay. But if the property is under your ownership for more than a year before you decide to sell it, you are qualified for a capital gains discount of 50 per cent. This means that you are only required to include half of the capital gain in your personal tax return.
Investing in property involves a lot of work and strategic decisions, but a raft of tax deductions helps make it worth it. By knowing and including all the potential rental property expenses on your tax return, you are able to claim a plethora of potential tax deductions that will boost your tax refund and allow you to have more cash in your pocket.
Before claiming any of these deductions, make sure to seek professional advice from your accountant or a property manager to make sure you don’t run into trouble with the ATO.
Body corporate fees
Body corporate fees are the costs each apartment owner pays to make sure the building and all its common areas are maintained and in good condition.
Council rates are a property tax paid by all property owners within a municipality to help pay for services provided by councils to maintain local roads, facilities and public open spaces.
Income tax is a type of tax that governments impose on income generated by businesses and individuals, used to fund public services, pay government obligations and provide goods for citizens.
Land tax, also known as property tax, is the fee paid on the purchase of a property owned by an individual or other legal entity.