Tax Deductions On Investment Property
Tax Deductions On Investment Property
Property is a popular investment asset, particularly in Australia. It provides a whole host of attractive benefits, only one of which is the allowable tax deductions on investment property. However, with the ongoing increases in mortgage rates, owning an investment property, and ensuring you see black at the bottom of the spreadsheet and not red, is becoming more challenging. Making all the tax deductions you are allowed will help you get the most out of one of Australia’s favourite investments. Property.
Benefits of Property Investment
Before we get into the specifics of tax deductions on investment properties, let’s take a quick look at why property investment has, for so long, been a favourite with Australian investors:
- Income Generation – whilst many investments provide income in the form of dividends, investment property income, when you have a tenant, is both regular and reliable. It is also closely tied to the value of the asset, which is not always the case with more liquid assets like shares.
- Protection against volatility – even with the current property market volatility, the movement of property prices is generally slower and less intense than the comparatively volatile share market
- Capital Growth – whilst it is true property prices in Australia have reportedly dropped slightly in the past 1-2 years, the drop has not been enormous. Due to the relatively high entry costs, property Investment is usually considered a medium-to-long-term financial strategy, which means property is an asset which should be viewed over a period of 5 years or more. In fact, over the past 25 years, median property prices have increased by 412%.[i]
- Tax Deductions – Unlike other investments, property investment carries with it ongoing costs. These costs, if managed well, can provide you with tax deductions, both in individual financial years, and as ongoing depreciation.
Increasing interest rates are creating a tricky environment for investors. On the one hand, the rates on any loans you might have against the property will be increasing your outgoings. On the other, there is a high demand for rental properties, and prices are at an all time high. In this environment, getting professional financial and real estate advice is more important than ever.
Recurring Financial Year Deductions
A number of ongoing costs you incur every year can be claimed as tax deductions on investment properties in your yearly tax return, including:
- Body corporate fees on units or townhouses
- Property management costs from real estate agents, including advertising for tenants
- Landlord insurance, which we highly recommend you obtain
- Council rates/land tax
- Property maintenance costs – gardening, mowing, pool care, repairs. It is important to note this differs from ‘improvements’. Necessary repairs are claimable, but adding value is not. A reputable real estate agent will be able to help you with advice on this seemingly fine line
- Pest control
- Legal costs related to the signing of leases for tenants
- Tax advice related to renting the property and completing the required tax documentation each year
- Accountant fees in managing your investment
- Interest paid on loans against the property
- Quantity surveyor costs – enlisting the assistance of a quantity surveyor to help prepare a depreciation schedule can be claimed in the year it is incurred
Amortised or Depreciating Deductions
Some expenses relating to investment properties can be claimed as depreciation over a number of years. This includes:
- Depreciation of the value of assets such as curtains and carpets in new properties
- Borrowing expenses, including loan establishment fees, broker fees, mortgage insurance, stamp duty, valuation costs, title search fees, and costs of preparing and filing mortgage documents
- Capital works – this includes structural alterations, extensions and additions. These can usually be depreciated over a 25–40-year period at a rate of 2.5% of the construction cost. These costs cannot be claimed until construction is complete.
If you purchased your property after 9 May 2017, there have been changes to what you are able to claim as depreciation, so it is best to speak to your financial advisor or tax accountant if this affects you.
What You Can’t Claim
There are a wide range of costs associated with property investment that cannot be claimed as a tax deduction. These include:
- Cost of purchase and disposal of the property (real estate commission)
- Costs not incurred by you (tenant’s utility bills for instance)
- Expenses not related to the renting of the property – for instance your personal use of a holiday home which is rented out part of the year
A Word About Holiday Homes & Granny Flats
If you have a holiday home that you use yourself, and also rent out, tax deductions on the expenses related to the property will need to be calculated on a pro-rata basis. For instance, if the property is rented out 50% of the time, you can only claim 50% of the related expenses.
Similarly, if you rent out part of your home, for instance a granny flat, or an upstairs or downstairs you are not using, your claims will need to be pro-rata.
The Importance of Professional Advice
Investing in property is simple enough. However, the ins and outs of what you can and can’t claim are anything but.
Not only are the rules complicated, but they change regularly, and something that is acceptable one year, may not be the next. To avoid running foul of the tax department, and to ensure you receive the maximum claimable return, it is essential that you seek professional tax and legal advice, both prior to purchasing, and in relation to any expenditure you make that you believe might provide a tax concession.
For some tips on how to go about investing in property, check out our article ‘Investing in Real Estate’ (December 2021).
Manly Financial Services have the experience and understanding to provide you with up-to-date expert advice on all general property investment and tax related matters. If you are considering investing, give us a call on (02) 9976 3388, or contact us via the below link.