How to maximise your tax return as an investor

Information verified correct on December 11th, 2016

Maximise tax deductions for investors

Property can be an incredibly tax-effective investment strategy, if you’re armed with the right information.

Australia has a unique love affair with property as an investment class. Not only is bricks and mortar seen as a safe investment, but Australia’s tax code means property investors can see enormous benefits at tax time. To make sure you’re getting the most out of your investment property, it’s important to understand the tax benefits available to investors.

Deductions you can take

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 interest

The interest on a property investment loan is fully tax deductible. For this reason, many investors choose interest-only home loans. These loans allow investors to pay only the interest portion of the loan without making payments on the principal. This maximises investors’ tax deductible debt.

In addition to the interest on an investment loan, any accompanying bank charges are also deductible.

Insurance

Any home and contents insurance, landlord’s insurance or other insurance related to the investment property is 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.

A word about repairs versus improvements

While repairs can be deducted during the tax year in which they occur, improvements to a property cannot. An improvement differs from a repair in that, while a repair restores an item to its original condition, an improvement alters the original condition. For more read our guide about repairs versus improvements.

Costs to rent your property

Property investors can deduct costs pertaining 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.

Taxes

Land taxes and council taxes are fully deductible.

Depreciation

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.

Investors can also depreciate building construction costs for things such as major renovations or additions.

Read our guide on property depreciation

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.

What could change

The caveat to this strategy is that the upcoming 2016 Federal Election could change negative gearing. Under the Labor Party’s proposal, negative gearing would be limited to newly constructed properties. However, grandfathering arrangements would be put in place for existing negatively geared investors.

For a full discussion of how negative gearing could change after the election, read our guide to proposed changes.

Capital gains tax

Capital gains tax, or CGT, is tax paid on the sale of any asset on which you’ve made a profit. 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 include the following:

Ownership costs

Ownership costs include things like:

  • Repairs and maintenance
  • Council rates
  • Home loan interest
  • Land taxes
  • Insurance

Improvement costs

These include any capital works you’ve undertaken on the property.

Title costs

Title costs are any fees associated with organising the title on your property.

Incidental costs

These include legal fees, agent fees, advertising and marketing fees, and stamp duty.

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 see how to best minimise your CGT bill, read our guide to CGT on property.

If you’ve held the investment property longer than 12 months, you will be eligible for a 50% discount on the capital gains tax.

What could change

The caveat to this is that, like negative gearing, the rules surrounding the CGT discount could change depending on the outcome of the Federal Election. The Labor Party is currently proposing to reduce the CGT discount from 50% to 25%.

Adam Smith

Adam has more than five years of experience writing about the Australian home loan market.

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