Investment property tax deductions

Owning an investment property can mean tax deductions worth thousands of dollars each year. Make sure you don't miss out on any tax claims.

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As a property investor, you can claim a number of immediate property-related deductions, along with deductions relating to depreciating assets and capital works deductions. The value of your investment property tax deductions can be worth thousands of dollars per year. This guide explains the various deductions available so you don’t miss out on claiming money back at tax time.

Tax deductions checklist for property investors

Here is a list of deductions that you should keep track of to maximise your tax breaks:

  1. Mortgage interest on your investment loan
  2. Council and water rates
  3. Insurance, including building, contents and landlords policies
  4. Repairs and maintenance (for example, gardening, repairs to broken windows)
  5. Agent fees (sales commission is only applicable to capital gains tax (CGT) and cannot be claimed as a tax deduction)
  6. Administrative costs involved in preparing leases
  7. Strata levies
  8. Cleaning fees and pest control
  9. Bank charges
  10. Land tax, which is charged by the state or territory when your land value reaches a certain amount; you don't pay this on your owner-occupied home

Investors should record the immediate expenses that are deductible such as land tax, interest on property loans, repairs and maintenance, and insurance.

For depreciating assets such as appliances and capital works deductions such as renovations and remodelling, claim annual deductions. If you don’t claim all of your deductions, you could end up paying too much tax for no reason.

The difference between tax deductions and depreciation

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Tax deductions are property-related costs that the Australian Taxation Office (ATO) allows you to deduct at the end of the financial year. Depreciation is the reduction in value over time of parts of your property.

The ATO recognises that over the years, natural wear and tear mean that parts of your property lose value. This can be both the building itself and some of the features inside it, such as appliances, carpets, drapery and blinds. The ATO allows you to claim this "depreciation" in your tax return each year.

A tax expert or quantity surveyor can help you set up a depreciation schedule for your property, but below is an example of how a depreciation schedule can help you get a bigger tax refund.

Let's imagine you bought an investment property with a $600,000 interest-only home loan at a rate of 3.00% per annum. You charge your tenants $450 a week for rent. Using a depreciation schedule, you claim a depreciation allowance of $6,000.

  • Annual rental income: $23,400 ($450 x 52)
  • Home loan repayments: $18,000
  • Strata costs and other fees: $6,000
  • Total cashflow position = $23,400 income - $24,000 costs = $600 loss per year

You receive a depreciation allowance of $5,000. At tax time, you include your $5,000 depreciation "loss" in your list of expenses. Now your situation looks like:

  • Annual rental income: $23,400 ($450 x 52)
  • Home loan repayments: $18,000
  • Strata costs and other fees + depreciation: $11,000
  • Total cashflow position = $23,400 income - $29,000 costs = $5,600 loss per year

You can now claim $5,600 at tax time, giving you a healthy tax refund (depending on your tax rate). Keep in mind that your depreciation claims must be added back to the cost base of the property when you sell it. If you own a property for 10 years and claim $50,000 worth of depreciation, for instance, you will need to add that $50,000 back to the cost base and you'll pay capital gains tax on that value when you sell.

Learn more about capital gains tax when you sell an investment property

Why you need a cash buffer as a property investor

A cash buffer is a crucial strategy for property investors. It will help take the stress out of property ownership, as it means you always have an emergency fund on hand. A cash buffer is useful when you have periods of vacancy, or if unexpected repairs need to be carried out.

If repairs have to be made as a result of damage to your property, you may be able to claim on your landlords insurance policy, but other expenses like a new dishwasher or maintenance will need to be funded out of your own pocket.

How much of a cash buffer do you need?

It’s a good idea to save a small amount each week to go towards your cash buffer account. If you can start with $1,000 in the account and add $50 per week from there, you’ll be in a good position to deal with any unexpected expenses that arise.

If your investment property is cashflow positive, meaning you make more in rental income each week than it costs you in mortgage repayments and other expenses, consider setting up an offset account. You can put any extra rental income in the offset account so it reduces the amount of interest you pay. At the same time, this account becomes your “rainy day” fund to pay for any emergency expenses.

If your investment property is cashflow negative, meaning you make less in rental income each week than it costs you to pay for the property, then work out how much your shortfall is each week. Multiply that figure by 13 to get three months worth of ownership costs. This is the amount you should aim to start with in your buffer account.

For instance, if your shortfall is $70 per week, you should aim to start with $2,100 in your buffer account, and add a small amount (say $30 per week) so you have the peace of mind knowing that if you lose your job, you can continue keeping up with your property investment obligations for at least three months.

You may also be able to apply for a PAYG withholding variation with the ATO. This allows you to access your property-related tax deductions through the year, rather than waiting for the end of financial year to get it in a lump payment.

What is a PAYG withholding variation and how can it help property investors?

Throughout the year, your employer withholds part of your income to pay your tax. At the end of the year, your tax return determines whether your employer has correctly estimated your tax liability for the year. If they’ve underestimated it, you’ll owe money to the ATO. If they’ve overestimated it, you’ll end up with a refund.

If you’re a property investor, there are a number of deductions you can claim that will significantly boost your tax refund at the end of the year. A PAYG withholding variation allows you to reduce the amount of tax being withheld from your pay throughout the year, in order to better reflect these deductions.

It’s basically like getting your tax refund early in the form of higher take-home pay. You could adjust your tax so you receive an extra $20, $50 or even more each week in your take-home pay. Visit the ATO to learn how to set up a PAYG withholding variation.

Are you paying too much for your investment home loan?

It's great to take advantage of tax deductions, but the best way to get ahead with your investment property is by saving money on the mortgage in the first place. Compare the latest investment loans and offers to make sure you're not paying too much.

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