It is no secret that Australians love investing in property. And while it can be an exciting prospect, it is essential to consider the finer details before jumping in, especially any ongoing costs and expenses you’ll have to pay.
Investment property tax deductions
It is vital that you’re aware of what you can and cannot claim as a tax deduction as a landlord.
For starters, did you know there is a difference between repairs and maintenance completed on the property versus improvements made?
The reason why this is so important to understand is that repairs and maintenance costs are claimable immediately as a tax deduction, while property improvements are claimable over several years (generally 2.5% every year for 40 years from the date that the improvements were completed). For example, lawn mowing, and land taxes can be claimed immediately, whereas renovating the kitchen needs to be claimed over several years.
The Australian Tax Office (ATO) allows the following expenses to be claimed immediately:
- advertising for tenants
- body corporate fees and charges
- council rates
- water charges
- land tax
- gardening and lawn mowing
- pest control
- insurance – building, contents, public liability, loss of rent
- interest expenses – related to borrowing
- pre-paid expenses – such as insurance premiums
- property agent’s fees and commission
- repairs and maintenance
- legal expenses
While these property improvements are claimable over several years:
- Capital works – costs that increase the value of your property, such as significant structural alterations, e.g. renovating a kitchen.
- Borrowing expenses – expenses such as loan establishment fees, lender’s mortgage insurance, valuation report fees, and title search fees are considered borrowing expenses.
- Depreciating assets – assets costing more than $300, such as carpets, flooring, roofing, hot water systems, etc., can be depreciated over time.
- Initial repairs – expenses incurred to fix existing damage after purchasing your property fall under initial repairs.
Take note these expenses CANNOT be claimed as a tax deduction:
- Loan repayments – you cannot claim your principal loan repayments as a tax deduction.
- Depreciating assets – from 9 May 2017, you cannot claim depreciation on assets if they have previously been used, such as second-hand furniture or existing carpet before you purchased the property. From 1 July 2017, if you rent out your own home, you cannot claim depreciation for assets that were in your home.
- Other unclaimable expenses – expenses paid by the tenant, personal use of the property, travel expenses to visit the property, and certain other costs like conveyancing (however, this cost is added to the initial price of the property, which can reduce your capital gains tax).
Why should you make property improvements or repair work before the end of the financial year?
Have repair or maintenance work that you have been putting off or trying to save for? Completing these repairs before the end of the financial year may allow you to immediately claim these expenses as a tax deduction, resulting in instant tax savings. Costs related to fixing a leaking pipe or regular servicing of appliances fall into this category.
Even though capital improvement expenses can only be claimed over several years, if you incur those expenses shortly before the end of the financial year, you can start claiming them a lot sooner than if they were completed in the first half of the financial year, for example.
Seek professional advice
Buying your investment property is just the start of your landlord journey. Once you have acquired your property, engaging a property manager to rent it out and manage it on your behalf may take a lot of the stress out of maintaining your property. They can identify the best candidates for your property and manage any simple repair work or major improvements.
Along with a property manager, your accountant is an important ally in your property investment endeavour. They will be your best source for information on claimable expenses and tax deductions and will also ensure your tax obligations are correctly lodged with the ATO.
And finally, above all else, enjoy your property investment ride. We guarantee it will be an interesting one!
Australian Tax Office https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/rental-expenses-to-claim/ “Rental expenses to claim” (14 July 2021).