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By Ken Raiss

Tax and Record Keeping Tips for your Investment Property

Do you make the most out of your potential tax deductions?

Do you keep good records to substantiate your tax claims?

Well, you should because the ATO regularly targets property investors, so it's important that you know what you can and cannot claim as a tax deduction.

What can you claim as a tax deduction?

Of course, expenses incurred in earning income, such as running your investment properties can be claimed as a tax deduction, but they generally fall into 2 groups:

1. Capital costs

An example is those associated with the purchase of the property.

Now here's where some investors make a mistake - these costs are not deductible against the rent you receive or against your other income.

They are added to the cost of the property so that when the property is sold it reduces your Capital Gains Tax.

The main ones are:

  • Conveyancing costs
  • Stamp Duty
  • Legal Fees
  • Search Fees
  • Buyers' Agency fees
  • Costs involved with Borrowing money from the bank. These can be claimed over the period of the loan or 5 years whichever is shorter.
  • Mortgage Insurance

2. Running costs that are incurred to maintain the property

Basically, these costs are anything spent on maintaining the property, such as:

  • Interest on your loans, but not principal repayments
  • Managing Agent's fees
  • Council fees, water rates,
  • Body corporate fees
  • Insurance
  • Advertising
  • Bank charges
  • Depreciation
  • Garden maintenance

What about Repairs?

Repairs to your investment property can be a tricky area as they can fall into one of two categories:

  1. Repairs: To maintain or repair means to replace to its original condition. So you can claim the cost of repairing a wooden fence back to a wooden fence.
  2. Improvements: If you were to improve on the original condition of an item this becomes capital expenditure and you can only depreciate this cost - not write it off as an expense straight away. For example, if you were to replace a wooden paling fence with a brick fence.

8 helpful tips on record keeping

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Note: Your investment property should work for you and not the other way around.

So it's important that you are not burdened with hours of paperwork that discourages you from buying your second or third properties.

The best way to manage your records for tax with a minimum of fuss is as follows:

  1. Ask a real estate agent to manage the property for you and get them to pay for all expenses from the rent they collect for you. You'll get a  monthly summary and at the end of the tax year, they should provide you with a summary of all rent you've received and all the expenses paid on your behalf. You can then give this to your accountant.
  2. Keep records of any expenses you pay yourself. Be careful to avoid recording the expenses paid by your real estate agent as you will run the risk of claiming the expenses twice.
  3. You don't need to give your accountant the receipts but file them away in case you are asked for them in an audit by the ATO.
  4. You can provide your bank loan statements to your accountant or you can simply summarise the interest paid on your loans on a spreadsheet.
  5. The first year is the most complicated because it involves creating a "Purchase Sheet" that is carried forward from year to year so that when you sell you have accurate records of what was incurred to determine your Capital Gains Tax
  6. Don't forget to get a Depreciation Schedule from a Quantity Surveyor as your accountant is not permitted to estimate fixtures and fittings or building values. This is a very important item as it allows you to claim an expense without having to pay cash for it. It's simply a paper deduction but allowed to be claimed against real rent received.
  7. If you have carried out renovations make sure you have a "Scrapping Schedule" that allows you to claim the items you have demolished as a tax deduction.
  8. Make sure you use a tax accountant who understands property.

ALSO READ: Investment property tax benefits explained: How does owning an investment property affect taxes?

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles

Every year ATO releases simple yet comprehensive "Rental properties [Year]" document. Keeping expenses throught the year (as they occur) in the ATO supplied workshet makes tax time easy. You can even use ATO mobile phone app to automate record keepin ...Read full version

1 reply

Good and practical post..Hopefully some works for one and not for another..But definitely can be given a trial.

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