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Investment property tax deduction

Tax deductions let Australian property investors cut their taxable income by thousands of dollars, offsetting their investment costs while generating capital growth.

What you need to know:

  • Australian property investors can receive tax deductions for costs of maintaining a property.
  • It's important to keep accurate records of the costs you're incurring.
  • There are also several things you cannot claim as part of owning an investment property.

What tax deductions can I claim on an investment property?

According to the ATO, Australian property investors can claim tax deductions on "expenses for your rental property that relate to the management and maintenance of the property, including interest on loans".

Investors can claim tax deductions on:

  • Loan interest and fees.
  • Water charges and council rates.
  • Maintenance and repairs, including gardening, cleaning and pest control.
  • Insurance (including building, contents and landlords insurance policies).
  • Body corporate fees and charges.
  • Property management fees.
  • Legal and accounting fees and charges.
  • Advertising for new tenants.

You can claim these expenses in the year they occurred.

Example: How investors use deductions to minimise their tax bill

Let's say you purchase a $650,000 investment property with a 20% deposit. You get a 30-year investment loan with interest-only repayments. You rent the property out for $500 a week.

  • Your loan amount: $520,000
  • Your loan interest rate: 6.00%
  • Your annual salary (pre-tax): $120,000
  • Your annual rental income: $26,000

Because you're only making interest payments on the loan, the mortgage expense is completely tax deductible.

Now you just need to tally up all your tax deductions, minus your rental income.

Deductions
DeductionCost
Loan interest$31,200
Loan fees$1000
Conveyancing fees$2,000
Council rates$1,500
Strata fees$2,000
Insurance$4,500
Minor repairs$1,500
Total cost$43,700
Total loss minus rental income$17,700

Thanks to all your deductions you have an investment loss of $17,700. You can subtract this loss from your taxable income:

  • Your taxable income before deductions (salary + rent) = $146,000.
  • Your taxable income after deductions (salary minus investment loss) = $102,300.

And finally we can estimate your tax savings using the ATO's simple tax calculator.*

  • Tax on $120,000 annual income = $29,467.
  • Tax on $102,300 income (minus investment losses) = $23,714.
  • Your tax savings = $5,752

*Keep in mind our calculation is just a simple estimate and doesn't take into account your other tax deductions, expenses and income sources.

In the example above, your investment cost you $17,700 to maintain in the first year. But factoring in your investment tax deductions it only costs you $11,947.

So while you're still losing money this year you're looking at a significant tax discount. And while you're holding the property you're also benefiting from capital gains as it grows in value.

What investors can't claim as tax-deductible expenses

Investors can claim deductions on the interest they pay on their investment loans. But they cannot deduct the loan principal (the money they've borrowed).

And investors can't claim the following as tax deductions:

  • Stamp duty paid when purchasing the property.
  • Expenses such as repairs and maintenance carried out before the property is rented out.
  • Cost of travelling to inspect the property.
  • Expenses incurred when selling the property.
  • Expenses incurred when using an investment property for private purposes. If you lived in your investment property for 30% of a financial year and rented it out for 70% of the year, you could only deduct 70% of the expenses.

How depreciation can help boost your tax refund

There are some other property expenses investors can't claim entirely in one financial year.

This includes capital works (substantial renovations or construction) and the decline in value of depreciating assets (such as curtains, carpet, appliances that aren't a structural part of the property).

However, investors can claim the depreciation on these expenses over a number of years.

How depreciation works

Depreciable assets are defined by the ATO as "separately identifiable, not likely to be permanent" and "not part of the structure of the building".

You can claim depreciation on parts of a rental property you've paid to upgrade, such as:

  • Floating timber floorboards and carpet
  • Appliances (stoves, air conditioners, fridges)
  • Curtains
  • Furniture

You can claim depreciation on these items over a number of years via a depreciation schedule.

An accountant can help you with depreciation claims but you can also engage a quantity surveyor. They specialise in creating tax depreciation schedules that property investors can use to maximise their tax deductions.

Example: Boosting your tax return with a depreciation schedule

You purchase a $700,000 investment property. Your rental income for the property equals $29,000 a year.

Adding up all your deductible costs, you can claim back $35,000 in the first year of owning the property.

This means you're negatively geared, with a $7,000 tax loss.

But you've also spent $7,000 replacing carpets while renting out the property, plus $8,000 installing a new heating system. You hire a quantity surveyor to create a depreciation schedule. Based on the schedule you can claim a further $2,000 in the first year for those depreciable assets.

Now you can claim $37,000 in tax deductions this financial year and offset your taxable income by $9,000.

How do I maximise tax deductions as a property investor?

To maximise your investment property tax deductions you must:

Thinking

1. Understand exactly what you can claim as deductions

Claiming the maximum amount of deductions boosts your savings and reduces your tax liability to the fullest extent. This means you need to know exactly what you can and cannot claim.

Files

2. Keep detailed records of expenses and income

It's vital to record all your income and expenses related to the investment property. This way you can prove to the ATO that your expenses are genuine and have been used for your investment property.

Accountant

3. Employ an accountant

While it is certainly possible to manage this yourself, many property investors employ an accountant to help them maximise their deductions.

Schedule

4. Get a depreciation schedule

If you have spent any money replacing fixtures and fittings that qualify as depreciable assets, or on capital works to improve the property, you can claim the depreciation for these assets and works.

Consider hiring a quantity surveyor to get the maximum amount of depreciation each year.

Plan

5. Have a clear strategy before you purchase your investment

Your investment strategy determines the type of property you purchase, how you structure the investment loan and how you factor in your tax deductions.

Knowing what you're doing from day one makes it easier to keep accurate records of every expense and helps you maximise your tax savings.

More questions about tax deductions for property investors

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.

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