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:
You can claim these expenses in the year they occurred.
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.
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.
| Deduction | Cost |
|---|---|
| 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:
And finally we can estimate your tax savings using the ATO's simple tax calculator.*
*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.
Learn more about capital gains tax when you sell an investment property
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:
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.
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:
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.
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.
To maximise your investment property tax deductions you must:
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.
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.
While it is certainly possible to manage this yourself, many property investors employ an accountant to help them maximise their deductions.
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.
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.
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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