If you have taken a loan to buy (or build) a rental property, you can manage your tax returns more efficiently by claiming various tax deductions to improve your cash flow, such as:
- The interest on your investor home loan is fully deductible.
- Various costs associated with renting, such as hiring a property agent, drawing up a rental agreement, and the money spent on repairs to make the house fit for rental, are tax-deductible. It’s also possible to claim some legal costs, garden maintenance, insurance premiums, land tax and council rates.
- You can claim depreciation deductions for capital works (that relate to the property’s construction costs) and plant and equipment assets (which generally include the fittings, fixtures, and appliances in your home).
- It’s possible to offset the losses made on an investment property against your taxable income. An investment property is said to make a loss when rental income from the property is less than the sum of the home loan repayments and other relevant property expenses. It helps you mitigate short-term losses through tax deductions to maintain your cash flow.
Tips to manage your tax returns as a property investor
While the ATO provides significant benefits to property investors regarding the expenses they can claim, it is very strict about compliance. Therefore, it’s important to know exactly what and how much you can claim and get your paperwork right when claiming deductions. Here are some tips that will help you stay on top of your tax returns to avoid fretting at the last moment or filing an incorrect claim.
- You are only allowed to claim the interest charged on an investment loan. You cannot claim any payments made towards the principal amount borrowed for an investment property. You also cannot claim interest for the entire loan if a part of it has been used for private purposes.
- Hire a professional quantity surveyor to draw up a depreciation schedule for your property. A depreciation schedule will give you a schedule of removable equipment and capital works equipment, clearly outlining what you can claim in terms of property depreciation. This will help you avoid any classification errors as you may lose out on some depreciation benefits if you mistakenly classify plants and equipment as capital works. The depreciation rate on these assets is much higher than for capital works.
- Keep all your receipts handy if you plan to claim property management expenses like hiring a rental manager or garden upkeep.
- If you own investment properties in a foreign country, make sure to declare any income you make on these properties. You might be eligible for some tax deductions on these properties, but it’s best to consult a professional to find out what you can claim.
Taxation traps to avoid as a property investor
- If you own a holiday home that you rent out, you can’t claim costs for periods when you or your family occupy the property. You also cannot claim what your tenants pay for (read electricity and gas bills).
- When you sell an investment property, you’ll either make a gain or a loss, which must be recorded on your income tax statement. If you make a profit, you’ll be charged capital gains tax. No capital gains tax is charged if you make a loss, but you cannot offset this loss against your assessable income.
- It’s usually better to apply for an investment loan than to use an existing loan facility to fund an investment property. Using the same loan for investing and covering your private expenses can make it difficult for the ATO to identify the costs relevant to the investment property. If you want to find out more about investment loans or how to build a property portfolio, you could contact a broker or ask a Hashching expert for their opinion.