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.