Taking full advantage of the investment property tax deductions that are available to you can equal extra hundreds or even thousands of dollars of saved tax into your pocket each year. The majority of property investors either don’t know how to maximise their tax benefits or they claim deductions incorrectly. Whatever type of property you have, knowing what you can and can’t claim is important knowledge for investment success.
If you don’t understand the rules regarding tax deductions on investment property, and you are audited, chances are the tax penalties will eat up all positive cash flow of your investment property. Also, if you are failing to claim on items you could be claiming on you are missing out on valuable tax deductions.
Let’s say you find an extra $1,000 per year you can claim in investment property tax deductions that you didn’t claim before. If you are paying 30% tax on your income then you could be saving yourself an extra $300/year! That could make the difference between a property that is positively cash flowed and one that is negatively geared.
Tax Deductions vs Tax Evasion
Keep this general idea in mind. Investment property exists to make you money, when you make money you pay tax. When there is an expense that you are a required to pay in order to continue making money from your property (eg. Rental manager fees) then that is usually a tax deduction. The expense almost always has to aid the investment to continue making money.
For example, in most cases you are participated to make a trip to view your property at least twice per year. So you could most likely claim flights for yourself to visit the area and 1 night’s accomodation to inspect the property…that’s a tax deduction. However, you probably couldn’t claim to fly your entire family to the area and stay for 10 days and pay for all your food and entertainment (eg. the theme park) incurred over those 10 days…that is tax evasion.
So be careful and always seek professional advice. With that said, I think it’s time everyone learns what can or can’t be claimed as tax deductions.
List of Allowable Investment Property Tax Deductions
*A disclaimer: Always speak to a professional taxation adviser. This articles contains information that is of a general nature and may not be applicable to all investors. Seek professional financial advice before making any taxation decisions.
Please also note that the majority of these deductions are for investment properties (when you are renting it out). Not for your principal place or residence.
1. Accounting fees – These include expenses for hiring a professional to help in tracking the income and expenses of an investment property, including the filing of tax documents.
2. Advertising expenses – Payments for advertising in local ad-listing sites, real estate agencies, newspapers, billboards, shopping centres, and online publications are deductible only if the property is available for rent.
3. Fees and commissions for agents – If you pay a property manager to handle things on your behalf, then you may claim his fees and commissions as a tax deduction. Property managers usually charge for reference checks of tenants, issuing rental statements, and calculating year-end financial statements. They also usually charge a percentage of the rent collected (anywhere from 5-10%).
4. Body corporate fees – Investment properties in an apartment complex, high-rise and most community buildings are charged body corporate fee to cover the building owner’s expenses in maintaining common areas. These are typically charged quarterly and may be claimed as tax deductions.
5. Borrowing expenses – Payments related to borrowing funds for investment purposes, not including loan interest, can also be claimed. If the total expenses incurred are less than $1,000, then it could be claimed as immediate deduction, but if it’s more than that, then it could be claimed gradually over 5 years or the span of the loan- whichever is shorter. It includes fees and charges for:
a. Title search
b. Loan establishment
c. Costs related to preparing and filing mortgage documents
d. Property valuation
e. Mortgage insurance
f. Mortgage broker’s fee
Always seek professional advice on this one as it is a bit trickier to track than the other ones.
6. Interest charges on loans – Payments for loans used for property investment purposes are tax deductible, but only payments credited towards the interest component are considered in this. This means if you are paying off $500/month on your loan but your interest is only $300/month then you can ONLY claim the interest portion (the $300) you can’t claim the full amount.
For this reason many property investors choose to invest using interest only loans, as this helps them to maximisie cash flow and also to maximise the tax deductions over the lifespan of the investment.
7. Property improvements – In most cases improvement to a property CANNOT be claimed as a tax deduction immediately. However, you can depreciate these improvements over time (how much you can depreciate varies). So if you invest $5,000 to improve your property you can’t claim that $5,000 this financial year…but you can claim depreciation on that $5,000 over time (eg. $250/year or 5% for 20 years).
8. Cleaning and gardening expenses – costs incurred on cleaning supplies, hiring cleaning professionals, trimming plants, mowing the lawn and applying fertiliser may be claimed as a tax deductions.
9. Council or local community rates – billed to property owners to help pay the cost of common infrastructures and services provided to the local community. This is paid either quarterly or annually.
10. Depreciation – Tax deductions on asset depreciation could be claimed immediately or over a number of years. Consider getting a report from a quantity surveyor, so you can get detailed information on which assets are eligible for deduction and how much you can claim.
Depreciating assets include items such as:
a. Heaters and air-conditioning units
b. Carpets and other removable floor covers
c. Window treatments- curtains, blinds and other tapestry
f. Refrigerators and freezers
g. Cooking range, ovens and range hoods
h. Water heater
i. Cleaning systems
j. TV sets
11. Water, electricity, and gas – may be claimed as a tax deduction only if you are paying the bills.
12. Legal fees – day-to-day expenses that require legal assistance are tax deductible, hence legal expenses during the purchase of the property are not included in this. These expenses include legal fees paid when drawing a rental agreement, disputing claims with tenants and evicting
13. Repairs – tax deductions may only be claimed on repairs done to the rental, not on improvements. How do you differentiate between the two? Well, if the work done restored something (an appliance or furniture, part of the house) to its original state, then it could be claimed as deduction. However, if the work done improved the function, look, or performance of the object beyond what it was – then it will not be tax deductible and instead will need to be depreciated over time.
14. Travel expenses – costs incurred while checking a potential investment, or a rental you already own may only be claimed as deduction only if the expenses are related to the property in question. Say you travelled to another town to check a rental, and then you stayed there for five days, but only one day was spent towards work related to the property – in this case only expenses incurred during the one day is deductible.
15. Land taxes – Property owners who own more than the set amount of land (varies per state) may incur land tax. This is an extra expense that comes as a result of owning a large portion of land.
16. Scrapping Schedule – If you are doing improvements to the property and are throwing out a bunch of existing items (eg. Carpet, ovens, light fittings etc) then you can get a scrapping schedule done. This will allow you to write off the remaining value of these items as a tax deduction.
So How Do I Start Claiming Tax Deductions On My Investment Property?
Speak to an accountant of taxation advisor about what property tax deductions apply to your investment and what you can begin claiming. It may cost you a couple of hundreds dollars up front to get started, but once you are on top of it it really isn’t that hard to claim these items and keep track of them.
Then you can continue to claim these expenses and save on tax year in and year out.