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How does owning an investment property affect taxes?

As an investment property owner of around 15 years, I’ve been hit with just about every property expense you can think of.

Hot water systems that suddenly stop working.

Air-conditioning units and dishwashers that no longer turn on.

I once received a sky-high water bill that prompted me to do some digging; it revealed a deep, buried water leak that cost several thousand dollars to locate and repair.

And there was that time a leak from our apartment’s unit into the property below turned out to be a waterproofing issue, which wasn’t covered by insurance, and cost $10,000 to repair.

The bottom line is that owning an investment property can see you paying a number of bills every month.

But if you buy the right type of quality property in the right location, it can also help you grow your wealth.

And as an added incentive, the expenses involved in owning an investment property help you pay less tax.

Specificity of income tax on investment property

The majority of the costs associated with owning a rental property can be deducted against your regular income tax, which reduces the amount of tax you pay overall.

Let’s say you earn $80,000 a year. In total, you spend $25,000 paying for your investment property, but you receive $20,000 in rental income.

The difference ($5k) between the money you receive in rental income ($20k) and the money you spend paying for the property ($25k) is tax deductible.

That’s $5,000 worth of expenses you can claim against your regular income tax.

The ATO would assess your tax as if you’d earned $75,000 instead of $80,000.

Every week or fortnight or month, you’ll pay tax as if you earn $80,000.

But when you file your tax return, you’ll get a refund on the additional tax paid on the $5,000 difference.

According to current tax rates, that’s around $1,625 back in your pocket.

You can also generally make a decent claim each year for depreciation, which is an allowance for the wear and tear of the property over time.

Investment property tax deductions in Australia – a breakdown

Home Taxes2So what kinds of expenses can you claim when you 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.

Some of the specific investment property tax deductions you’re entitled to as a landlord include the following:

  • The cost of placing advertisements looking for tenants.
  • Bank charges, including break fees if you end a fixed loan.
  • Body corporate fees and charges (not including special levies).
  • Building, contents, landlords, and public liability insurance.
  • Council rates.
  • Consultants and professional fees related to owning your investment property, such as an accountant, quantity surveyor, or pest control expenses.
  • Depreciation, relating to the wear and tear of the building and its contents (you’ll need to get a depreciation schedule prepared at a cost of around $600-$700 — this fee is tax deductible too.)
  • Electricity and gas charges you pay for (in most cases, tenants pay these costs).
  • House MaintenanceGardening expenses.
  • Mortgage interest repayments (but not the principal part of the repayment).
  • Property management fees, commissions, and charges.
  • Professional copywriting, photography, or videography to advertise the property.
  • Repairs and maintenance.
  • Some legal costs and lease document preparation expenses.
  • Water supply rates and charges (excluding any water usage paid by the tenants).

I’ve highlighted what you can claim on an investment property – but what about the costs that are not tax-deductible?

According to the ATO, some of the property costs you can’t claim at tax time include the following:

  • Stamp duty charged by your state or territory government when you purchase the property – this is a capital expense.
  • Legal expenses, including solicitors' and conveyancers' fees for the purchase of the property – again, this is a capital expense.
  • Renovation expenses. Repairs are allowable deductions, while renovations are capital expenses. Think of it this way: repairing one broken kitchen cabinet is tax-deductible. Replacing all of the kitchen cabinets with new ones is not.
  • Borrowing expenses on any part of the loan you use for private purposes. For instance, if you refinance your investment property loan and use $20k of your equity to renovate your own personal kitchen, the interest on that loan is not tax-deductible. This can be really tricky to manage and track, so it’s a good idea to keep your private and investment-related loans separate wherever possible!

What’s a capital expense and can you claim it at tax time?

Capital ExpensesYou may be wondering what a “capital expense” is?

Well, when you consider all the expenses involved in owning your investment property, tax benefits don’t just include immediate tax deductions.

There are also expenses that can be claimed as capital expenses.

When it comes to stamp duty, you can’t claim a tax deduction for this expense.

But it will form part of the cost base of the property for CGT purposes when you sell the property.

If you paid a stamp duty of $20,000 on a property purchase price of $500,000, then when it’s time to sell your investment property, the ATO would treat the purchase as if it cost you $520,000.

As for your other capital expenses, depending on the value, you may be entitled to claim them over a period of 5 years from the date you took out the loan for the property.

Tax Return

For example, you may be able to claim legal fees that set you back $400 at a rate of $80 per year for 5 years.

This is a rough calculation since your exact claim depends on the date you took out your loan versus how many days are left in the financial year.

As you can see, the way the ATO treats tax deductions when you’re preparing your investment property tax return is not exactly straightforward!

There are a number of different, subtle yet important rules and guidelines that govern what you can and can’t claim.

It’s a good idea to book in with an accountant to help you prepare your tax return, so you can take advantage of every possible tax deduction.

There’s no need to pay more tax than you need to – and, best of all, your accountant’s fees will also be tax-deductible.

Author: Sarah Megginson, senior editor of home loans for Finder.

ALSO READ: Which property investment fees and charges are tax deductible?

About Sarah Megginson is senior editor of home loans for Finder. She was previously managing editor of Australian Broker magazine, Your Investment Property magazine, and online home loan comparison site, Your Mortgage. Sarah has worked as a finance and property journalist for more than 15 years.
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