Understanding your investment property tax deductions can significantly enhance your tax return. However, regrettably, many investors miss out on potential expense claims due to a lack of knowledge regarding the Australian Tax Office's (ATO) guidelines. Realizing the full scope of available tax breaks can make the difference between hoping for a profitable investment property and achieving positive cash flow. This article provides valuable tax tips to help you maximize your investment property tax deductions.

What Rental Property Deductions Can You Claim?

1. Depreciation Just as wear and tear are inevitable for vehicles, your investment property is also subject to general wear and tear, which affects its financial value. This is known as depreciation. Fortunately, depreciation qualifies as a rental property deduction, allowing you to offset it against your income over time.

Capital Works Depreciation (Division 40)

For properties built after 16 September 1987, you can claim an investment property tax deduction for building depreciation costs. Renovation expenses on your investment property are also deductible, but unlike maintenance costs, they are spread over several years as a Capital Works deduction. Typically, you can claim 2.5% of the construction cost annually for 40 years. Example: Layla constructed her investment property in 2001 for $400,000. She can claim an annual investment property tax deduction of $10,000 until 2041 due to building depreciation.

Plant and Equipment Depreciation (Division 43)

1 Depreciation

You can also claim depreciation for wear and tear on fixtures and fittings within the property, such as carpets, cupboards, air conditioning units, ovens, and showers. Furthermore, it's worth considering engaging a quantity surveyor to prepare a depreciation schedule for your investment property. In addition to this, their fees qualify as an investment property tax deduction 2. Loan Interest The largest investment property tax deduction available is the interest on the loan used to purchase the property. If you obtained a loan from a bank for your investment property, you can claim the interest charged on that loan as a rental property deduction. Example 1: Jane took a $420,000 loan to buy an investment property and paid $12,600 in interest in the same year. She can claim this interest as a deduction. However, it's important to note that if a portion of the loan was used for personal purposes, you can only claim interest on the specific portion that was used for income generation. Example 2: Sam took a $300,000 loan, using $285,000 for the investment property and $15,000 for a vacation. He can only claim a portion of the interest expense based on the investment property loan amount.

Top 18 Rental Property Tax Deductions 2023

3. Rental Expenses As a landlord, you incur various expenses related to renting out your property, which can be claimed as rental property deductions in the same tax year they are paid.
    • Advertising Costs: Expenses for advertising platforms to find tenants are tax-deductible.
    • Body Corporate Fees: Fees for units or townhouses, covering insurance and shared area maintenance, are deductible.
    • Borrowing Expenses: Any amounts it took to borrow the money to buy this property, amortized over 5 years, or 60 Months.
    • Cleaning: Costs for cleaning services, including post-tenant cleaning, are deductible.
    • Council Rates: Costs for rubbish collection and street maintenance, if you pay them.
    • Gardening Costs: Garden maintenance expenses are deductible, excluding landscaping improvements.
    • Property Insurance: Insurance premiums for property and contents are deductible.
    • Land Tax: If the property is rented, you can claim land tax, subject to state regulations.
    • Rental Agent Fees: If you appoint a property agent, their fees are deductible.
    • Utilities: If you cover water, electricity, and gas expenses, they are tax-deductible.
    • Repairs and Maintenance: Costs to maintain, not improve, the property are deductible.
    • Pest Control: Expenses for pest control are immediately deductible.
    • Tax Advice: Fees for tax advisors assisting with land tax claims are deductible.
    • Stationery, Phone, and Internet Costs: Expenses related to property management are deductible.
    • Bank Charges: Fees on the loan used to purchase the property are tax-deductible.
  • Accountant Costs: Accounting fees are deductible, encouraging professional tax management.
4. Capital Gains Tax (CGT) If you sell your investment property within 12 months of owning it, you are liable to pay CGT on the profit in full. However, if you've owned the property for more than 12 months, you become eligible for a 50% CGT discount. Consequently, you would only pay tax on half the gain, and this amount is subsequently included in your tax return

What You Can't Claim on an Investment Property

According to the ATO, expenses not considered investment property tax deductions include:
    • Expenses incurred for personal use of the property.
    • Repayments of the principal sum borrowed to purchase the property.
    • Solicitor and conveyancer fees for property purchase or sale.
    • Other expenses related to property purchase or sale.
  • Stamp duty fees for property transfer.
Travel expenses for property inspection were previously claimable; however, under a new tax law, they are no longer eligible for reimbursement.

Key Takeaways

To optimize your tax return, refer to the ATO's comprehensive list of claimable rental property deductions. Armed with this knowledge, you can take full advantage of tax return opportunities offered by your investment property. Keep in mind that you must retain receipts, invoices, and other documentation to support your claims. Start maximizing your tax deductions today and boost your investment returns, make an appointment or call us! Disclaimer: This guide provides general information for property investors and is not a substitute for legal or tax advice. Seek professional advice for specific tax or legal matters in your investment affairs.