Investment property tax deductions are one of the most misunderstood areas when it comes to owning a residential investment property. Investors are often unaware of the deductions they are entitled to claim and miss out on lucrative tax deductions.
Deductions can be claimed on related expenses for the period a property is rented or available for rent, for example, advertised for rent. The two main deduction categories are:
- Management and maintenance costs
- Borrowing expenses, depreciation and capital works
Property management and maintenance
Investors can claim immediate deductions for expenses involved in the maintenance and management of their investment property. This includes things such as:
- Property management fees
- Body corporate fees and charges
- Repairs and maintenance
- Accounting/tax agent fees
- Council rates
- Land tax
- Advertising for tenants
- Gardening, cleaning and pest control
- Insurance including public liability, building and contents
Repairs and maintenance
Owners of investment properties can claim deductions for any repairs and maintenance they carry out on their property. A repair involves the replacement or renewal of a broken or worn out part such as guttering, broken windows and electrical appliances. An expense is considered maintenance if it is carried out to prevent or fix deterioration. This includes painting, plumbing maintenance and pest control.
Repairs and maintenance should not be confused with renovations/improvements. Renovations/improvements are classified as capital improvements under the capital works depreciation category and cannot be claimed fully in the year the expense is incurred. Rather, they can be claimed at 2.5 per cent for forty years from the construction completion date. Examples of renovations/improvements include adding or removing an internal wall, adding a new kitchen, bathroom, carport or fence.
Interest on a loan
Investors can claim the interest on the loan used to purchase their property as a tax deduction. Other borrowing expenses that fall under allowable investment property tax deductions include loan establishment fees, mortgage broker fees, ongoing loan fees, lenders mortgage insurance (LMI) and the cost of preparing mortgage documents.
One of the most important tax deductions for investors is depreciation. Owners of income producing properties are entitled to claim the wear and tear on their properties and contained assets as a depreciation deduction.
If an investment property was purchased prior to 7:30pm on the 9th of May 2017, the owner can claim depreciation for any plant and equipment assets within the property as well as any available capital works deductions.
Plant and equipment assets are the easily removable and mechanical items considered not fixed to the building and include items such as hot water systems, air conditioning units and curtains.
If a property was purchased after 7:30pm on the 9th of May 2017, plant and equipment depreciation can only be claimed if the property is brand new or is considered to be substantially renovated. Owners of second-hand residential properties purchased after this date can only claim depreciation on plant and equipment assets they purchase directly for the property.
Investors can claim capital works deductions for the depreciation that occurs to the structure of their property. This applies to any residential building where construction commenced after the 15th of September 1987. Investors are entitled to claim capital works at a rate of 2.5 per cent for up to forty years.
Owners of older buildings built before 1987 should still find out what deductions are available, as often these buildings will have undergone some form of renovation which can result in capital works deductions for the owner.
Investors should engage a specialist Quantity Surveyor, such as BMT Tax Depreciation, to prepare a tax depreciation schedule to maximise their depreciation claim. A schedule lasts for the lifetime of the property (40 years) and is the best way to ensure every claimable dollar is captured. In the 2017-2018 financial year, BMT found their residential investor clients an average of $8,893 in the first full financial year alone.
For more information on investment property tax deductions, head to the Australian Taxation Office website.