While being a property investor might see you forced to pay a number of unforeseen bills each month, there are several tax breaks for investment properties that can significantly boost your financial returns.
I’ve been an investment property owner for many years now, and I’ve been slugged with just about every property expense that you can think of.
Chris Dang, Metropole Wealth Advisory
From hot water systems that suddenly stop working to air conditioning units or dishwashers that no longer turn on and even surprise repairs that aren’t covered by insurance.While this might be true, buying the right type of quality property in the right location will also help you grow your wealth.
And as an added incentive, tax breaks for investment properties help you pay less tax.
That’s because the majority of the expenses involved in owning a rental property can be deducted against your regular income tax bill, which reduces the amount of tax you pay overall and increases your cash flow.
Tips: Leveraging these property investment tax deductions supports the development of a successful property portfolio and means you’ll be in a better position to grow your property portfolio further in the future.
Of course, that's not the reason to buy an investment property, but tax deductions are “icing on the cake.”
So, what kind of expenses can a property investor claim when they own an investment property?
The costs can add up pretty quickly, but the upside to shelling out for ongoing maintenance, repairs, and mortgage interest is that the list of expenses you can claim on your tax return is longer than a supermarket receipt for a large family.
To ensure you don’t miss anything, here’s a comprehensive list of the top property investment tax deductions in Australia that all investors should be claiming.
1. The cost of advertising and marketing for new tenants
Your property manager will charge you for marketing your property, or for advertising it for lease. If you or your agent market your property using online, print media, brochures, and signs, you can claim these advertising expenses against your income in the same year that you paid for them.
James owns a two-bedroom apartment that he rents out as an investment property. After his previous tenants moved out, James needed to find new tenants quickly to minimise the time his property was vacant. He decided to invest in advertising and marketing to attract suitable tenants and spent $500 on online advertising and $200 on a local newspaper ad. He also spent $300 on professional photography and $100 on printing brochures. The total of $1,100 is fully tax-deductible.
Case study by Metropole Wealth Advisory
2. Loan interest and bank fees
If you have a principal and interest loan against your investment property, while you can't deduct the principal repayments, you can claim a tax deduction for any interest accrued on your regular repayments as an investment expense.
3. Body corporate fees and charges (not including special levies)
If your property is on a strata title, you can claim the cost of body corporate fees. These often include common area maintenance and garden expenses, as well as building and public liability insurance.
4. Building, contents, landlords, and public liability insurance
If you have insurance on your investment property, you can claim the cost in your tax return. Landlord insurance typically covers tenant-related risks such as damage to the contents and building, or loss of rental income.
5. Council rates
Council rates can be deducted in the year that they are paid, although you can only claim them during periods in which the house was rented.
Lucy owns an investment property that was only rented for 219 days in the last financial year. She can only claim rates for that period, which amounts to 60% of the total council rates she paid.
Case study by Metropole Wealth Advisory
6. Property management fees
A great real estate agent or property manager helps you achieve the best results from your investment property, with the added bonus of any fees charged being tax-deductible. This includes fees for valuations, depreciation reports, and inspections.
Emily rents out a three-bedroom house via a property management company, which charges 8% of the annual rental income as a management fee, plus a one-time letting fee and inspection fees. Her total property management-related fees are fully tax-deductible.
Case study by Metropole Wealth Advisory
7. Depreciation, relating to the wear and tear of the building and its contents
To claim depreciation, you’ll need to get a depreciation schedule prepared. Depreciation covers assets like timber flooring, carpets, curtains, appliances, and furniture. You can use the diminishing value or prime cost method to calculate depreciation.
8. Negative gearing
Negative gearing occurs when the costs of owning an investment property exceed the income it generates, resulting in a financial loss that can be claimed as a tax deduction.
9. Gardening expenses
Property owners can claim the upkeep and replacement of plants and structures as an immediate deduction, but not for improvements that add extra value to the property.
10. Land tax
If the dwelling on your investment property is rented out, you can claim land tax as a deduction.
11. Utility fees (which are not paid by the tenant)
You can claim the basic costs for any electricity, gas, or water supply fees that you pay during tenancies.
12. Pest control
Professional pest control costs are tax-deductible.
13. Repairs and maintenance
Repairs and maintenance can be claimed as a tax deduction in the same income year as they occur, if the repairs are a result of wear and tear.
Jane and Robert needed to repair a leaking roof, broken tiles, and repaint a wall in their rental property. The $2,700 they spent on these repairs is fully tax-deductible as it restores the property to its original condition.
Case study by Metropole Wealth Advisory
14. Some legal costs and lease document preparation expenses
If you hire legal professionals for tenancy-related matters, such as eviction or unpaid lease, you can claim this as a tax deduction.
15. Capital gains discount
If you sell your investment property after holding it for more than a year, you are eligible for a capital gains discount of 50%, meaning you only need to incorporate half of the capital gain into your personal tax return.
What you can’t claim on your tax
It’s also important to know which costs aren’t tax-deductible, including:
- Stamp duty when purchasing the property (this is a capital expense).
- Legal expenses for buying the property (these are also capital expenses).
- Renovation expenses (repairs are deductible, but renovations are not).
- Borrowing expenses on any part of the loan used for private purposes.
Note: There are several tax breaks for investment properties in Australia, so it’s important to know exactly what to claim and how to do it.
By understanding and leveraging property investment tax deductions, you can significantly enhance your investment returns. Accurate record-keeping and consulting with a tax professional are essential to maximize your benefits and minimize your tax liability.
