The 4 Major Categories of Rental Deductions You Can Claim for Your Investment Property.

The 4 Major Categories of Rental Deductions You Can Claim for Your Investment Property.

Undoubtedly, learning about your investment asset tax deductions would raise your tax return. 

However, since they are not prepared with the information presented by the Australian Tax Office (ATO), many taxpayers lose out on expense claims.

The difference between you expecting to gain enough money from your investment property and getting positive cash flow might be seeing the full potential of all the tax cuts available to you. 

The following list will equip you with some valuable tax advice on the best ways to maximise your deductions from investment property tax.

Written for Accountants Direct by Tuan Duong of Duo Tax Quantity Surveyors

1. Depreciation  

Just like cars, general wear and tear are unavoidable on your investment property. The wear and tear outcome would affect your property’s financial value. 

This is what is known as depreciation.

Luckily, depreciation is a tax-deductible cost for property owners. It is a tax loss on non-cash investment property that can be claimed over time and offset against your taxes.  

Capital works Depreciation (Division 40) 

If your investment property began building after 16 September 1987, you could demand a deduction of investment property tax on the cost of depreciation of the building.

If you plan to make some upgrades to your investment property, the construction costs would still be tax-deductible. But, unlike the maintenance costs, the construction costs would not be entirely deductible in the same year you pay for them.

During many years you can claim the costs in parts. This is regarded as Capital Works deduction. Similar to plant and equipment depreciation, this is a tax deduction for the non-cash investment property. 

Usually, from the time it was constructed, you can demand 2.5 per cent of the construction cost every year, for 40 years.

Plant and Equipment Depreciation (Division 43)

On any fixtures and/or fittings in the house, you can similarly claim depreciation for wear and tear. 

Things such as carpets, cupboards, air conditioning, an oven, and toilets, for example, include fixtures and fittings.

Quantity Surveyor Fees

You should ideally seek the advice of a quantity surveyor to optimise the return on your investment. They would help plan your investment property for a depreciation schedule. 

The benefit here is that the payments are a tax deduction on an investment property.

2. Loan Interest

This is the largest tax deduction on an investment property that you can receive. 

You are entitled to claim any interest paid on the loan as a tax deduction if you have had to take out a loan from the bank to buy your investment property.

3. Capital Gains Tax (CGT)

If within 12 months of owning your investment property, you sell it, you are entitled to pay CGT for the benefit from that sale. 

However, if you own the house for more than 12 months before selling it, you are liable on your CGT for a 50% discount. This means that you would only need to include in the tax return half of the capital gain.

Find out more on capital gains tax and how to reduce it, here.

What are you unable to claim on an investment property? 

According to the ATO, expenditures which are not deemed to be tax deductions for an investment property include: 

  • Expenses caused through personal misuse of your investment property; 
  • Reimbursements of the principal amount lent for the acquisition of the investment property;
  • Solicitor and conveyance fees for the acquisition or selling of the asset; 
  • Other costs incurred when the investment property was bought or sold; and 
  • Stemp customs duties levied on the transfer of the property to your name. 
  • Travel costs used to be claimable to inspect your rental property yourself, but can sadly no longer be claimed.

4. Rental Expenses

Renting it out is one way to produce earnings on your investment land. As a homeowner, you are responsible for all types of tax-deductible expenses per year.

These expenses can be claimed in the same tax year that you paid for them.

  • Council Rates

Such expenses include the cost of gathering garbage and maintaining the street on which your property is situated. 

You can claim this as an investment property tax deduction, given that you are the one paying the council rates, and not the tenant.

  • Utilities

If you are the one responsible for paying water, electricity, and/or gas, you can report such costs as a tax deduction on investment property. 

However, if you ask the homeowner to pay for the utilities, you cannot claim it as a deduction for rental property.

  • Property Insurance

Rental insurance is a no-brainer and a tax-deductible expense to secure your property and its contents.

  • Repairs and Maintenance

Given the work done on the property holds it and does not upgrade it, you can claim this as a tax deduction on an investment property. 

  • Advertising Costs

Using advertisement channels to locate tenants for your property constitutes a tax-deductible cost. 

  • Rental Agent Fees

If you want to hire a property agent to manage the property and maintain a good relationship with your tenants, you would be entitled to a fee that typically varies from 6% to 8%.

Finding a rental agent may be a tax deduction for investment properties 

  • Legal Expenses 

When preparing the rental papers, you may wish to obtain legal assistance. 

Or you could find yourself in a position where you need legal representation to help you get an eviction order. Legal advice is a tax exclusion for investment properties.

  • Accountant Costs

A great reason to hire an accountant to prepare your tax returns and find ways to optimise your tax return is the fact that accounting fees are tax deductible.

  • Pest Control

Hiring a pest controller to get rid of pest property is a cost incurred while ensuring that rental income continues to be generated by your investment property. 

So, it is an expense you can report on your taxable return as an instant deduction from investment property tax.

Similarly, it is tax-deductible to have the house properly cleaned after the occupant vacates the home.

  • Gardening Costs

A claimable cost is the garden care and replacement of plants and/or garden structures on your investment property. 

However, any changes made to the landscaping that would increase the value of the property will not be claimable.

  • Body Corporate Fees

If your investment property is a unit or a townhouse, you’ll have to pay corporate body fees. This fee includes building insurance and mutual area repairs. 

When you (not the tenant) pay it, it is an investment property tax deduction.

  • Stationery, Phone, and Internet Costs

The leasing of your investment property is similar to the management of a corporation. 

Any use of the stationery, telephone and internet can be stated as a deduction from investment property tax if it relates to the management of the investment property.

  • Land Tax

You are entitled to claim land tax as a deduction from investment property tax as long as you have rented out the house on your property. 

* As each State has its own land tax laws, please check with a tax advisor on how to ensure that you apply the correct claim in the correct year.

  • Tax Advice

These payments are also deemed instantly tax-deductible if you plan to make use of a tax attorney to assist you in filing your land tax claim.

  • Cleaning

If, for example, the rental arrangement with the neighbour requires a weekly cleaning service, this will be a deduction from investment property tax. 

  • Bank Charges

Any tax-deductible bank fees paid on the loan used to buy the investment property.

Key Takeaways

Make sure you use the ATO’s detailed list of claimable rental property deductions to optimise your tax return. 

You would be in the best place to take advantage of all the tax return opportunities available from your investment property by arming yourself with this information.

Remember: Without evidence, you can not claim any of the listed expenses as deductions from investment property taxes. Make sure that you always retain receipts, invoices, and all other records relating to your investment property’s revenue-generating expenses.

Thanks to Tuan Duong from Duo Tax Quantity Surveyors for this informative article.

ATO hones in on rental deduction claims

ATO hones in on rental deduction claims

From Accountants Daily June 2020

Book your 2020 tax return here

Rental deduction hotspots for this tax time have now been identified by the ATO as it anticipates a change in claims because of COVID-19 and recent natural disasters.

Rental deduction claims continue to be a focus point for the ATO leading into tax time 2020, with the agency doubling its in-depth audits last year on the back of findings that nine out of 10 claims contained an error.

With more than 2.2 million Australians claiming over $47 billion in deductions in 2017–18, the ATO has recognised that COVID-19, bushfires and floods have placed residential rental property owners in unforeseen circumstances, resulting in reduced rent, deferred payment plans and mortgage repayment deferrals.

ATO assistant commissioner Karen Foat noted that rent will only need to be included as income at the time it is paid, meaning if tenants have been given a rent deferral until the next financial year, these payments should not be included.

However, rental insurance that covers a loss of income will still need to be included in tax returns as assessable income.

While the banks have moved to defer mortgage loan repayments, Ms Foat noted that rental property owners are still able to claim interest being charged on the loan as a deduction, despite the repayment deferrals.

The ATO, however, will continue to scrutinise overclaimed interest, where some taxpayers have been directing some of the loan money to personal use, such as paying for living expenses, buying a boat or going on a holiday, and then claiming that loan interest as a deduction.

Impact on short-term rentals

Despite the impact of COVID-19 and natural disasters on short-term rental demand, Ms Foat noted that deductions are still available provided the property was still genuinely available for rent.

The ATO will look at factors such as reserving the property or leaving it vacant over peak periods, not charging the market rate and the types of terms and conditions of the bookings when deciding if active and genuine efforts are being made to ensure a property is available for rent.

Data matching with share economy platforms, such as Airbnb, will also be used to give the ATO greater oversight.

“Generally speaking, if your plans to rent a property in 2020 were the same as those for 2019, but were disrupted by COVID-19 or bushfires, you will still be able to claim the same proportion of expenses you would have been entitled to claim previously,” Ms Foat said.

“If owners decided to use the property for private purposes, offered the property to family or friends for free, offered the property to others in need or stopped renting the property out, they cannot claim deductions in respect of those periods.  

“If you or your family or friends move into the property to live in it because of COVID-19 or bushfires, you need to count this as private use when working out your claims in 2020.”

Vacant land deductions

Recently legislated changes to tax deductions for vacant land mean that from 1 July 2019, taxpayers will no longer be able to claim deductions for holding vacant land with the intention of building rental property.

“So, if you are building a rental property, you cannot claim the deductions for the costs of holding the land, such as interest,” Ms Foat said.

“However, if your rental property was destroyed in the bushfires and you are currently rebuilding, you can claim the costs of holding your now vacant land for up to three years while you rebuild your rental property.”

The new law will not apply to land that is used in a business.

Other common errors

Ms Foat has also warned of taxpayers to steer clear of common mistakes that continue to pop up in returns each year.

These include claiming deductions for travel to inspect rental properties, not differentiating between capital works and repairs, and not apportioning claims for short-term rental properties when they are not genuinely available for rent.