Are You Making The Most of Your Investment Property?
As an investor you can claim a number of tax deductions. Here we outline what you can and cannot claim from the Australian Tax Office.
People who rent out their homes enjoy many tax benefits. The best-known of these is ‘negative gearing’ which allows investors to reduce their income tax by claiming expenses incurred on their rental property.
As the Australian Tax Office (ATO) freely admits, the rules and regulations around investment property are complex. For example, owners can claim for genuine repairs to rental property, but improvements may not qualify.
“If you make both repairs and improvements to your property, you can only claim a deduction for the cost of repairs if you can separate the cost of the repairs from the cost of the improvements,” according to the ATO. [1]
Genuine improvements, however, may be claimed over several years provided they are classified by the ATO as capital works.
“Capital works includes expenses for building the property as well as structural improvements, alterations and extensions to the property,” it says.
Brand-new apartments are great news for investors who can claim depreciation on the lifespan of the asset – usually 40 years. [2]
“Investment properties are bought with the goal of generating income – usually through rental income as well as capital gains,” according to Westpac. “This means they’re generally classed as a taxable asset.”
Dig deep for maximum rewards
Olivia Gee from Forbes Advisor says investors need to get their heads around the rules and regulations if they are going to enjoy the full tax benefits of owning – and maintaining – a rental property in Australia.
“The world of property investment isn’t just for high-flying suits or conglomerates,” she says. “According to 2023 figures from the ATO some 15% of Australian taxpayers are property investors.” [3]
Ms Gee says there are a raft of ongoing expenses that can be claimed against tax, including cleaning, gardening, pest control, strata fees and even water bills.
Owners may also claim for legal and accounting costs associated with the property – and interest payments on their home loan.
“Depending on the size of your mortgage and its home loan interest rate, this could the most significant tax deduction for an investment property owner,” says Ms Gee, a Sydney-based writer and editor.
“To be able to claim mortgage interest payments on tax, you’ll need to have purchased the property with the intent to rent it out as an incoming-earning asset, meaning that you’re paying down an investment home loan.”
Buy new and enjoy depreciation credits
Buying a new apartment off-the-plan, like those built by ALAND, as investment property also entitles landlords with depreciation credits which could give you a welcome cash boost in your next tax return.
ALAND CEO George Tadrosse says investors should look at their net position when assessing their potential investment returns – anything with high returns and low outgoings is a good prospect.
“Our apartments have had rapid capital growth and yields averaging over 7% per annum over the last few years. So that’s cash flow positive,” he says. “Being a new asset, the building depreciation credits are high meaning cash back for investors in their next tax return.”
As Mr Tadrosse says ALAND developments have the added attraction of incurring modest land taxes and council rates, plus new apartments come with warranties – keeping maintenance and repair bills to a minimum.
According to the Australian Financial Review an investor who bought a new apartment for $800,000 where the cost of the building was $500,000 could claim $12,500 a year against income tax for the structure alone. [4]
Depreciation can also be claimed against fixtures and fittings, such as dishwashers, but the tax benefits for these are calculated differently.
“Anyone who has ever bought a new car will know all about depreciation,” writes AFR columnist Jimmy Thompson. “But depreciation can apply to investment properties too, especially new ones, in ways that should make you smile.”
What you can claim
- Property management & maintenance
- Property Agent Fees
- Legal, Accounting and other Admin Costs
- Council Rates, Land Tax, Water Rates
- Essential Building Repairs
- Home Insurance Payments
- Interest on an investment home loan
What you cannot claim
- Transfer Duty (formerly Stamp Duty)
- Pre-rental Repairs and Renovations
- Travel expenses to inspect the property
- Advertising/conveyancing expenses when selling
- Expenses incurred when property not tenanted
- Any bills paid by your tenants
Claim now, or claim later
As Ms Gee from Forbes Advisor explains, some legitimate expenses can be claimed immediately against tax, while others need to be claimed over a much longer framework. [5]
“Property investors can claim costs associated with taking out a loan to purchase a property over five years,” she says.
“This type of dedication doesn’t consider ongoing interest payments, but can include fees for home loan applications, property valuations and lenders mortgage insurance (LMI).”
By contrast, most essential repairs can be claimed immediately against tax – provided they are genuine repairs and not improvements or renovations.
“For example, repairing a leaking ceiling is immediately deductible, but retiling the entire roof for aesthetic appeal isn’t,” she says.
Double check your tax claim
Given the sheer number of tax deductions on offer, it’s no surprise that many Australian landlords fall foul of the rules and get things wrong.
According to the ATO as many as nine out of 10 landlords make mistakes on their annual tax returns – a situation exacerbated by the large number of people still working from home since the Covid-19 pandemic. [6]
ATO assistant commissioner Rob Thomson told the Australian Financial Review that many of these false claims are often genuine mistakes when taxpayers are rushing to complete their annual returns in early July.
“Take your time to get your return right,” he said.
Mr Thomson says many landlords claim capital expenses for initial repairs to newly purchased property or improvements made when the owner themselves was occupying the property and not available for rent.
“This year, we’re particularly focussed on claims that may have been inflated to offset increases in rental income to get a greater tax benefit,” he said.
“You can claim an immediately deduction for general repairs like replacing a damaged carpet or a broken window. But if you rip out an old kitchen and put in a new and improved one this is [classified as] a capital improvement and is only deductable over time.”
Sources:
[2] Westpac
[3] Forbes
[4] AFR
[5] Forbes
[6] AFR