Investing in property remains a popular tool for wealth creation in Australia. However, many people don’t venture into property investing due to lack of financial knowledge. For example, a new survey pointed out that less than half of those surveyed were aware of the tax deductions they could claim on an investment property. Overall, the results pointed that women and millennials had lesser knowledge about tax deductions as compared to men and those aged above 35 years, respectively.

Here’s what every property investor must know about tax deductions

Breaking down the results of the survey, 44 percent of the participants were aware that they could claim real estate management fees as a deduction. Surprisingly, only 39 percent participants knew that the interest payable on an investment loan is tax deductible.

Often, people shy away from investing in property because of the associated costs. However, understanding the claimable costs of buying a rental property can help you assess your finances better. This is not to say that tax reduction should be your reason for purchasing a property. However, tax deductions can help reduce your overall costs, making it more affordable to buy and maintain a rental property.

If you have been toying with the idea of purchasing an investment property, here’s a roundup of what you can claim:

Interest expenses

The interest payable on your mortgage for an investment property is tax deductible. However, if the same loan funds your home and rental property, ensure that it is appropriately structured to identify which part of the loan relates to the rental property. This way, you can work out how much of the interest payable can be claimed against your rental income. Note that you cannot claim a deduction if the property is not rented out or no longer available for rental.

Rental expenses

As a landlord, you incur considerable expenses to manage your property and maintain it in top shape. Besides, there are costs associated with holding a property such as body corporate fees, council and water rates, etc. Luckily, most of these costs, including your property agent’s fee, can be offset against your rental income. Here’s a list of rental expenses you can claim:

  • Advertising for tenants (Note that advertising costs for sale are not deductible)
  • Property agent fees and commissions
  • Property repairs and maintenance (includes cleaning, gardening, pest control, etc.)
  • Reasonable travel expenses for inspecting a rental property
  • Insurance
  • Body corporate fees
  • Council rates
  • Water rates
  • Land taxes

Did you know you can also claim the professional fee you pay to your accountant to prepare, manage and lodge your tax returns for a rental property?

Depreciation deductions

As buildings get older, they wear out or depreciate. The ATO recognises this and allows rental property owners to claim this depreciation as a tax deduction.
Two kinds of deductions are allowed – Capital works deductions and deductions for plant and equipment assets.
Capital works deductions refer to structural wear and tear of the property and are calculated by taking into account the construction date, construction cost and the type of the property.
Deductions for plant and equipment assets refer to the deductions for removable assets used in a building such as heaters, air conditioners, exhaust fans, ceiling fans, carpets, etc. The deductions for these items are calculated according to their effective life, updated and regularly notified by the ATO.
Note that if you bought your investment property after 1930 on May 9, 2017, you can no longer claim depreciation on plant and equipment assets that are acquired as a part of the property. Besides, you cannot claim deduction on depreciating assets if you have lived in a house before renting it.

Learn more about depreciation deductions here.

Now that you have a fair idea of what you can claim as an investor, here are some common pitfalls to avoid:

  • You cannot claim a deduction for interest or other expenses if a property is vacant or no longer available for rent.
  • Using an existing loan to fund your investment property can be cumbersome, as it makes it difficult for you as well as the ATO to ascertain expenses relevant to the investment property.
  • If you are using the same line of credit for private purposes as well as rental expenses, you cannot claim deductions on the part of the loan used for private purposes.

In general, it is good practice to keep a clear record of your expenditure. By keeping all your receipts in an orderly manner throughout the year, you can save yourself a lot of confusion (and even money!) during tax time.

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By Vidhu Bajaj,
HashChing Content Writer



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