Have an investment property?
It’s time to start thinking about ways to maximise the refund on your investment property tax return.
Here are the top 9 tax deductions for rental property owners to help.
Did you know that interest on rental property is usually the biggest tax deduction for a property owner? Yep! Interest you pay for purchase of your rental property, renovations, repairs, or acquiring appliances like aircon is tax deductible.
That’s not all… You can also claim interest you have pre-paid up to 12 months in advance and use it as an effective tax planning strategy. However, you can’t claim interest on the portion of the loan used for private purposes. For example, if you borrow against your investment property to buy a car, then the interest portion relating to the car can’t be deducted.
It doesn’t matter if you borrow the money against the investment property or against another asset, like your family home. So long as the use of that borrowing is to earn income from the rental property, you will be able to claim a deduction for the interest paid. However, you must keep accurate records to be able to calculate the interest that applies to the rental property portion of the loan.
Remember, if you are constructing an investment property you intend to rent, you can deduct the interest during construction without having to wait to complete the property and rent it out. This means you can off-set the loss due to interest against your salary income and save tax – Awesome!
Depreciation and capital works are usually the second largest rental property deduction. More importantly, it’s a non-cash deduction. While there is no cash outflow, you still get to write off a portion of the building (capital works) and appliances (depreciation) you have purchases. And…when it could save you up to $3,500 p.a. in tax, why would you want to miss out?
A good way to maximise the depreciation and capital works deduction is to use an ATO approved quantity surveyor who can prepare a report with a schedule of the amount to claim for the next 40 years. This may cost you $400 (tax deductible) but will more than pay for itself with the amount of tax you can save in the first year itself – Pretty awesome, right?
When we say ‘repairs’, we mean work to make good or remedy defects that may cause damage or deterioration to the property. If the repairs or maintenance provide something new or alter the character of the item, then it a capital expense. The difference is that the latter is deductible over a period of time, as either depreciation or capital works, as opposed to immediately as in with a repair. It can be a fine line at times and its best to speak to a property tax expert for advice.
So, what’s repair and maintenance? Here are some examples:
• Air-conditioning repairs
• Fixing gutters
• Roof leak repairs
• Broken window replacement
• Pest control
If you receive an insurance payout for the cost of repairs, it will be taxable and you must include this amount as income on your tax return.
Any fee or commission you pay to your real estate agent to manage the property or advertise for tenants is a deductible tax expense – Every little bit helps.
How do you claim it? Your real estate agent should provide you with a yearly statement of rents collected, commissions and any maintenance expense or rates and taxes paid on your behalf.
As you would know, many fees come with owning an investment property. Lucky for you, fees paid to accountants, lawyers, real estate agents, investment advisors and other professionals in connection with your investment property can all be deducted.
These fees can be deducted as operating expenses in the year they are incurred, as long as the fees are paid for work related to your rental income. If they relate to the purchase or sale of your property, they will then be considered a capital expense.
You may incur strata fees if your investment property is a unit, apartment or townhouse. These fees however, are deductible as soon as they’re incurred.
To cover day to day expenses and a sinking fund charge, they’re often levied as an administration charge. If, however, a special levy is raised for a major capital item, such levy will not be immediately deductible.
Did you know that you can deduct any bank fees or charges associated with your investment property bank accounts in the year you incur them?
Borrowing costs are expenses relating to loan like establishment fees, title search fees and costs for preparing and filing mortgage documents. You can also deduct the cost of borrowing over 5 years.
As a property owner, you’d know that many taxes come with it. Council rates, water rates and land taxes incurred for your investment property are all immediately deductible.
Keep in mind though, if you do recover any charges such as excess water charges from your tenant, they will need to be returned as income.
Insurance… Yet another expenses that comes with owning an investment property. But guess what? You can deduct the premiums you pay for almost any insurance for your rental activity too.
This includes home and contents insurance and landlord liability insurance.
With the right tax tips and deductions, you really can boost the refund on your investment property tax return.
Want to find out more or receive some personalised advice? We are accountants specialising in property investment and are happy to offer you a free consultation.