Your Ultimate Guide to investment property tax deductions

There’s no denying that buying a residential investment property is a great way to prepare for your retirement or diversify your investment portfolio. The Australian Tax Office (ATO) has some great tax incentives to encourage investors to keep on investing.

But are you claiming everything you’re entitled to? Or are you missing out on some juicy tax deductions that could minimise the tax you’re paying? Investment property tax deductions can be tricky and confusing, but it’s incredibly important for you to understand. This is because the benefits are twofold - you want to make sure you’re claiming all that you can, while ensuring you aren’t claiming things you shouldn’t be.

While this list certainly doesn’t replace personalised advice (because every situation and property is different) it’s a great starting point to understand what tax deductions you can claim.

What the Australian Tax Office (ATO) wants

You’re claiming tax deductions through the ATO so why not start by understanding what it is they want from you.

The ATO website says:

‘If you rent out property, you need to:

• keep records right from the start

• work out what expenses you can claim as deductions

• work out if you need to pay tax instalments throughout the year

• declare all rental-related income in your tax return

• consider the capital gains tax implications if you sell.’

Loan Interest 

If you borrowed money to buy a property, and you used all the borrowed funds for the property purchase, you can claim any interest charged on the loan as a tax deduction.

For example: Levi took out a loan to buy an investment property and rented it out. Over the year, he paid $35,000 interest and $800 in loan fees. Levi can claim these fees against his personal tax return.

But if Levi used any part of the loan for private purposes, he won’t be able to claim the interest on that portion of the loan as a deduction.

Depreciation 

There’s two main components when claiming depreciation – building, and plant and equipment.

Building

Depending on when your property was constructed, and any renovations you did prior to 1992, you may be able to claim on the depreciation of the building’s structure.

If the property was built prior to September 16, 1987, you can’t claim depreciation on the original construction costs. If built after this date, you can claim a deduction of 2.5% per year for up to 40 years.

Likewise, you can’t claim depreciation deductions on renovations completed before 27 February 1992. However, you can claim depreciation on structural upgrades done after this date at a rate of 2.5% for up to 40 years.

Plant and Equipment 

This covers everything from your light fittings and fixtures, carpets and curtains to dishwashers, ovens, air con etc.

When it comes to these sorts of items, wear and tear is almost inevitable and a time will come when they need to be replaced. As they’re installed at different times, they will also depreciate at different rates.

As the items decline in value, you can claim them as depreciation over several years. However, you can only claim depreciation on assets that meet certain criteria.

Remember how we said things can get tricky? We suggest you have a depreciation schedule done by a quantity surveyor to ensure you’re claiming what you should be and getting the most from your tax deductions. If this is not done correctly, you stand to either underestimate the tax deductions you can make, or worse yet you may have a tax audit done if your figures are not in line with what the ATO would expect.

Capital Gains Tax (CGT) 

If you buy and sell your property within 12 months and make a capital gain (profit), you must pay tax on all 100% of the profit.

However, if you hold onto the property for more than 12 months, you’ll only have to pay CGT on 50% of the profits.

Other expenses 

Over the course of owning and renting out a residential investment property, you’ll incur a variety of other expenses. Many of these can also be claimed as tax deductions.

What follows, while not an exhaustive list, certainly covers some of the most common tax deductions.

Advertising costs 

If a landlord wants tenants, they have to advertise. These costs can include print media, brochures, signs and online platforms and are all tax deductible expenses.

Real estate agent fees

Fees and commissions paid to agents who find tenants or manage the property on behalf of the landlord are tax deductions.

Insurance 

Building and/or contents insurance is fully tax deductible.

Legal Expenses 

If you seek legal counsel to prepare rental documents, to evict a tenant or hire counsel to appear in court because of a bad tenant, all legal fees are tax deductible.

Stationery and phone costs

Being a landlord is similar to running a business so the ATO lets you claim the relevant portions as a tax deduction for things such as internet, phone, stationery and electricity.

Council rates

Council rates cover rubbish bin collection and street maintenance. If you, and not the tenant, are covering these costs, it’s a tax deduction.

Utilities 

Much like council rates, if you’re covering the electricity, water and gas costs, and not the tenant, you can claim them against your tax.

Property and garden maintenance 

If repairs relate to wear and tear or maintenance, you can claim them as an immediate deduction.

Maintaining the garden and/or garden structures are also tax deductible.

If you replace an appliance, such as a dishwasher, or fridge, this will be a depreciation deduction over the life of the item.

Pest control 

This is classed as an immediate tax deduction.

Cleaning 

A deep clean after the tenants vacate is a tax deduction. You can also claim if the rental agreement with your tenant includes a weekly or fortnightly cleaner.

Strata or Body Corporate Fees

If you buy a unit, townhouse or villa, you’ll pay body corporate fees. These fees cover building insurance and maintaining common areas and are tax deductible. 

Bookkeeping and accounting fees

A wise landlord has a good accountant because, as we’ve seen, property investments can become confusing quickly. When you use your accountant to help with your investment property finances, you can then claim your bookkeeping, accounting fees and tax advice as a tax deduction.