Knowing which deductions you can claim each financial year is the key to maximising the profits from your investment property. If you’re feeling confused and overwhelmed because your rental properties aren’t performing as predicted, then it’s likely you’ve been missing out on some important deductions!
To qualify for any of these deductions, your property must be rented or be available for rent. This means you must either have current tenants or be actively advertising your property to renters.
Here are the top 5 deductions for eligible property investors.
1. Depreciation
Property investors can claim the depreciation of their income-producing properties against their taxable income. The most experienced property investors will consider the age of the building and its assets when looking for their next property to purchase, but many others are none the wiser and leave thousands of dollars unclaimed every year. But can anyone claim depreciation? The answer is yes…however there are some important dates and restrictions you should be aware of. Generally speaking, there are two types of depreciation allowances available being Plant and Equipment and Building Allowance/ Capital Works.
Plant and Equipment
These depreciating assets, such as an oven, dishwasher, dryer, air-conditioning unit, carpet etc etc, loose value based upon a useful life determined by the ATO. When it comes to claiming P&E assets as a deduction, there’s recent legislation that many new investors won’t like… May 9th, 2017 is the key date here. Properties purchased for investment prior to this date are fully capable of claiming these deductible items (subject to their effective life), and brand-new properties are also eligible HOWEVER, if you bought an existing home (ie. not brand new) after 9th May 2017, P&E is no longer allowed to be deducted for existing assets…
Building Allowance / Capital Works
Claiming your tax deductions can include ‘Capital Works’ which are construction costs for the property (as long as the building was built after 1985). Things like extensions, alterations including kitchen and bathroom reno’s, carports, retaining walls, gazebo and any other structural improvement. In terms of their deduction rate, capital works usually depreciate at 2.5% over 40 years.
Depreciation is one of the best tax breaks available to property investors, but in order to claim it you must have a ‘depreciation schedule’ complete by a qualified Quantity Survey. The good news, the cost of the schedule is deducted in the year it was prepared.
2. Loan interest and borrowing expenses
Did you know that in addition to your monthly and annual bank fees, the expenses directly incurred through borrowing funds to purchase your investment property can be claimed as a tax deduction? These expenses include:
- Loan establishment fees
- Title search fees
- Costs of preparing and filing mortgage documents
- Mortgage broker fees
- Fees for a valuation required for loan approval
- Lender’s mortgage insurance billed to the borrower
If your total borrowing expenses are more than $100, the deduction is spread over five years. However, if the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
The interest you pay is also an eligible deduction, but many property investors confuse this with payments made on the principal sum of the loan, which are not tax deductible! If you’re paying back the principal along with interest, only the interest portion of your payments can be claimed as a tax deduction.
It’s also important to note that the interest on loans secured for a private purpose, like a holiday, can’t be claimed as a tax deduction because this only applies to interest on loans taken out for income-generating purposes. Even if you refinance part of your home loan for private purposes, you will be unable to claim interest on the entire sum of the loan.
3. Advertising for new tenants
There are usually some costs involved in advertising your rental property online, in newspapers, in brochures, or on signs. It can get pretty expensive, especially without a current tenant covering your costs. Fortunately, property investors are able to claim the advertising costs as a deduction against their rental income in the same year the advertising is paid for.
4. Property management fees
Managing an investment property can be a lot of work, so it makes sense to hire a real estate agency to manage it for you – especially since property management fees are also tax deductible They’ll usually charge a fee of around 6-8% of your rental income, which can be claimed as a deduction on your annual tax return.
The best property managers will do a lot more than just collect rent, find new tenants and maintain your rental property; they will help you manage compliance and generate wealth while taking the stress and turmoil out of your investment activity.
5. Accounting fees
Did you know you can claim the costs of any accounting fees incurred for the management of your rental accounts in the same year those costs were incurred? It makes sense to hire an investment property tax specialist for expert advice, preparing your tax returns and helping you maximise your profits from your property portfolio. The smartest property investors leave the task of claiming all their other deductions in the hands of an expert!
Software that helps manage and miminise your tax is also a deduction, and there’s an awesome new player TaxTank heading up this space for property investors. With built in tax tips, permanent document storage and live bank feeds you can be sure you capture every possible deduction and safeguard against those sneaky ATO audits…
Every property is different, just as every property investor has different goals. However, one thing we all have in common is that we’d love to know exactly what’s happening with each property at any given time, so that we can make the best decisions and minimise our tax. We all just want to feel tax confident, right? Is that too much to ask?
Well, no – not anymore! Sign up for a free trial of TaxTank to take control of your property tax with interactive reports and real-time data that ensures you never miss a a great opportunity.
