Many property investors self-assess their tax deductions. However, few have the knowledge and information to accurately prepare their own tax return. As a result, there are several commonly missed tax deductions.
The ATO recently reviewed individual tax returns to determine the difference between what should have been paid and what was paid. They found that nine out of 10 individuals with a rental property were making mistakes. These mistakes could result in an under or over claim.
The top three most commonly missed tax deductions were loan interest, borrowing expenses and repairs and improvements. The following are 13 deductions that have the biggest impact on your claim.
In this article we will inspect:
- Loan interest
- Borrowing expenses
- Repairs, maintenance and capital improvements
- Property depreciation
- Property management fees
- Real estate advertising costs
- Proving the property was genuinely available for rent
- Land tax and council rates
- Pest control
- Legal expenses
- Apportioning expenses and income for co-owned properties
- Incorrectly claiming when selling your investment property
- What can you do if you’ve missed tax deductions?
- Avoid missing tax deductions in future
If you require a home loan to purchase your investment property, you’re entitled to claim the interest as a deduction. Along with this, you can also claim interest on a loan used to purchase a depreciating asset for the rental property (like a new air conditioner), to make repairs or to finance renovations. You can only claim the part of the interest that relates to the rental property.
When you first purchase your investment property the borrowing expenses involved can be claimed as a tax deduction. These expenses can include loan establishment fees, title search fees and costs of preparing and filing mortgage documents. As outlined by the ATO, if your total borrowing expenses are more than $100, the deduction is spread over five years. If the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
Repairs, maintenance and capital improvements
According to the ATO, repairs are considered work completed to fix damage or deterioration of a property, such as replacing part of a damaged fence.
Maintenance, on the other hand, is work completed to prevent damage or deterioration of an asset. For example, oiling a deck is considered maintenance as it helps to preserve the quality of the property and prevent future corrosion.
Any costs incurred to repair or maintain your investment property can be claimed as an immediate tax deduction in the year of the expense. However, the ATO specifies that initial repairs for damage that existed when the property was purchased are not immediately deductible. Instead these costs are capital in nature and claimed over time.
A capital improvement occurs when the condition or value of an item is enhanced beyond its original state at the time of purchase. This must then be classified as either a capital works deduction or as plant and equipment depreciation. Capital works refers to the deductions available for the building’s structure and items deemed to be permanently fixed to it such as bricks, mortar, sinks and basins. While plant and equipment assets are items which can be easily removed from the property such as carpet, blinds and light fittings.
The ATO allows owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. As mentioned above, depreciation can be claimed under two categories – capital works and plant and equipment assets.
Depreciation claims help investors to reduce their tax liability and therefore pay less tax. The best way to ensure you maximise your depreciation claim is to organise a tax depreciation schedule.
Property management fees
If you enlist a real estate to manage your investment property, you’ll be required to pay property management fees. These fees are tax deductible and can be claimed in your annual tax return.
Real estate advertising costs
As an investor, you’re eligible to claim any rental advertising fees charged in the same year you paid for them.
Proving the property was genuinely available for rent
You can claim pro-rata depreciation deductions for the period your property is rented out or is genuinely available for rent. That is, the property is given broad exposure to potential tenants and considering all the circumstances tenants are reasonably likely to rent the property.
Land tax and council rates
You’re entitled to claim deductions for costs like land tax, body corporate fees and council rates relating to your investment property.
Rental property owners can claim pest control costs on tax. Depending on the cost of the pest control, you can generally claim these expenses as an immediate deduction.
The ATO stipulates that legal expenses involved in purchasing or selling your property, resisting land resumption or defending your title to the property are not tax deductible as they are capital in nature.
An investor is entitled to claim any expenses involved in evicting a non-paying tenant, taking court action for loss of rental income or defending damages claims for injuries suffered by a third party on your rental property.
If you claim rental income on your property, your insurance also becomes tax deductible. Insurances that may be tax deductible include building, contents, landlord, public liability or private mortgage insurance.
Apportioning expenses and income for co-owned properties
Co-ownership opens doors for investors by increasing buying power and reducing ongoing expenses like rates, repairs and maintenance. A depreciation schedule for a co-owned property provides deductions based on the percentage of ownership of each party. Splitting deductions by ownership can improve your eligibility for immediate write-off and low-value pooling.
The ATO allows property investors to claim an immediate write-off for assets with an opening value of less than $300. Where ownership is split, an accountant can apply this rule and claim an immediate write-off for items where an owner’s interest in the asset (as opposed to its total opening value) is below $300. If an owner’s interest in an asset is less than $1,000, these items can be added to a low-value pool. This allows the owner to apply accelerated depreciation rates, therefore increasing the claim.
Incorrectly claiming when selling your investment property
When you sell an investment property, you may make either a capital gain or a capital loss. This indicates the difference between the cost to buy and own the property and the amount you receive when you sell it. If you make a capital loss, you should include it in your tax return as this amount can reduce the tax you pay on future capital gains.
If you make a capital gain, you will need to include it in your tax return for that income year. A capital gain is added to your assessable income and may increase the tax you need to pay, known as Capital Gains Tax (CGT). If you own the property for more than 12 months, and you are an Australian resident, you may be entitled to a 50 per cent discount on tax on the capital gain.
What can you do if you’ve missed tax deductions?
If you have any of the commonly missed tax deductions the ATO allows investors to go back and amend previous tax returns to reclaim the dollars they have been missing out on. Investors will need to complete a request online on the ATO website or with the help of their accountant to request their previous tax returns to be adjusted.
A BMT Tax Depreciation Schedule also allows investors to amend past tax returns. The schedule covers all deductions available over the lifetime of a property to ensure you maximise your cash flow and is 100 per cent tax deductible. During FY2018/19, BMT found residential property investors an average first year deduction of almost $9,000. Request A Quote here.
Avoid missing tax deductions in future
Accurate record keeping can help when completing your tax return. Organising receipts and tracking spend for your investment property can be overwhelming but it’s an integral part of any successful investment strategy. It’s vital to keep all records and receipts relating to your rental property, from maintenance bills to property management costs. MyBMT’s new ‘Income and Expenses’ tool makes it easy to record and track property costs, so you don’t forego any deductions at tax time.