How to maximise your tax return as an investor
Owning an investment property can mean tax deductions worth thousands of dollars. Make sure you don't miss out on any tax claims with this cheat sheet.
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As a property investor, you're entitled to claim many different expenses at tax time. These can be immediate deductions, and longer-term deductions relating to depreciating assets and capital works deductions, which can be claimed over a number of years.
Tax deductions checklist for property investors:
This list of deductions will help you keep track of expenses so you can maximise your tax breaks:
- Mortgage interest on your investment loan - keep all bank statements
- Repairs and maintenance - including gardening, pest control, repairs and tradies
- Agent fees - such as the property management commission you pay each month
- Administration and advertising - the fees you pay to advertise the property for rent are deductible
- Council rates - these are payable twice a year and are fully tax deductible
- Water charges - you'll pay these 2-4 times per year, depending on location
- Insurance - landlords, building and content insurance polices are all deductible
- Land tax - if applicable, you'll receive an invoice once per year
If you fail to claim all of your eligible tax deductions, you could end up paying too much tax for no good reason. There are a number of immediate deductions available to property investors, as well as items that can be depreciated over the life of the home. Australia’s taxation system offers generous concessions to investors and allows them to deduct the following:
Home loan mortgage interest
The interest on a property investment loan is fully tax deductible. For this reason, many investors choose interest-only home loans, as it keeps your mortgage repayments lower and the full cost is tax deductible. These loans allow investors to pay only the interest portion of the loan without making payments on the principal. In addition to the interest on an investment loan, any accompanying bank charges are generally also deductible.
Property repairs and maintenance
Investors can deduct any ongoing repairs and maintenance of their investment property. Maintenance is any work carried out to prevent or fix deterioration, and can include things like gardening, plumbing or pest control.
Repairs are any works carried out to restore part of the property to its original state of function.
h3>Repairs vs improvements - what's the difference?
From a taxation point of view, repairs and maintenance are deductible whereas improvements are considered capital expenditure, which means you will need to deduct them over several years. The Australian Tax Office (ATO) defines repairs as the 'replacement of renewal of a broken part' and improvements are 'landscaping, insulating and adding a room'. For instance, replacing one broken cupboard in the kitchen is a repair. Replacing ALL of the cupboards in the kitchen is a replacement.
- Using a professional such as a quantity surveyor means you'll get an accurate depreciation schedule (and their fees are tax deductible).
- When doing renovations, make sure you keep track of everything you've thrown away and replaced - you may be able to deduct some of their value.
- Depreciating assets that cost $300 or less are generally immediately deductible in year one, not over several years.
Agents fees, admin and advertising
Property investors can deduct many costs related to offering their property for rent. This includes any agent fees, ongoing property management fees and administrative costs. You can also deduct any outlay for advertising your property and travelling to and from the property.
Council rates and water
Council rates are payable for the council providing services like waste management to the property. Generally, council rates are slightly higher for investors than they are for owner occupiers. Water charges apply for both the supply and usage of water. All of these fees are fully tax deductible on investment properties.
Any home and contents insurance, landlord’s insurance or other insurance related to the investment property is tax deductible.
Land tax is payable when you own land worth a certain amount in each state or territory. For instance, the land tax threshold in your state might be $600,000, which means you may be required to pay land tax if the value of the land you own in that state exceeds that value. Note that this applies to the land value, not the overall property value, and your own home that you live in is excluded from the calculation.
In addition to expenses you can deduct for the tax year in which they occur, property investors can also depreciate assets within a property that decline in value over time. These include things like appliances, carpets, curtains and furniture. However, these must be items purchased by you rather than a previous owner. Investors can also depreciate building construction costs for things such as major renovations or additions.
A note on negative gearing
Negative gearing is one of the most attractive tax benefits for property investors. The policy is a tax minimisation strategy that allows investors to deduct losses on their rental property from their personal income.
The idea behind negative gearing is to offset cash flow losses in the short term with an eye toward long-term capital gains. This doesn’t mean, however, that negatively geared property investors have to be out-of-pocket at the end of the tax year. With depreciation factored in, a property can be cashflow positive but still be negatively geared. Read our guide for an example of how you can negatively gear a property, but still generate cash flow.
Capital gains tax
Capital gains tax (CGT) is tax paid on the sale of any asset on which you’ve made a profit, including property. While CGT will only affect your tax bill when the property is sold, it’s helpful to understand how CGT is calculated so you can minimise your bill when you do decide to sell.
CGT on an investment property is calculated based on the sale price of the property minus what’s known as your cost base. The cost base of the property is the original purchase price, plus any expenses. Expenses for CGT purchases can include things like stamp duty and major renovations.
Note that you don't pay CGT on the sale of your own owner occupied property. In order to minimise the amount you pay in CGT, it’s important to keep very detailed records of all expenses related to your investment property. To learn how to minimise your CGT bill, read our guide to CGT on property.
If you’ve held the investment property longer than 12 months, you will also be eligible for a 50% discount on the capital gains tax.
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