A complete guide to rental property tax deductions

It’s tax time again and it seems the rules change a little bit each year. So, here’s all you need to know about what you can deduct as a property investor.

Interest expenses

If you have borrowed money to invest in property, you will have been paying interest on your loans. These payments will have increased significantly in the last couple of years thanks to the aggressive rate rising cycle presided over by the RBA.

The good news is that higher payments equals more to deduct from your taxable income.

Say you have a $240,000 property attached to a loan of $200,000 and you are paying 7% interest on the loan…that’s $14,000 a year you are paying in interest. That amount can be deducted from your income.

Bank fees related to the loan or accounts attached to the investment property can also be deducted.

Property Management Fees

Most savvy investors engage property managers to look after their assets and their fees can be claimed as a tax deduction. This includes costs associated with collecting rent, advertising for tenants, and property inspections.

Repairs and maintenance

You can claim money spent on repairs and maintenance as a deduction, provided any costs are incurred in maintaining the current state of the property, rather than improving it. Repairs must relate directly to wear and tear or damage that occurred as a result of renting out the property. This includes fixing leaks, repainting, and repairing electrical appliances.

So, say you have to replace ceiling fans due to wear and tear, those costs can be claimed. However, replacing ceiling fans with brand new air-conditioning is considered an improvement and can’t be claimed.

Insurance

Landlord insurance is a must for any investor. It’s relatively inexpensive and can cover you against damages incurred by tenants and periods of vacancy in which you may not be receiving a rental income. The good news is that it’s also fully deductible.

Other policies related to your investment property, such as building insurance and contents insurance are also deductible.

Depreciation

Depreciation is a non-cash investment deduction that allows you to claim the costs of wear and tear on your property over the years. If you contact a quantity surveyor, they can prepare a depreciation schedule for your investment property. They only need to do this once and the schedule can be used year after year.

There are 2 types of depreciation that you might be able to claim.

Capital works: If your property was built after 16 September, 1987, you can claim depreciation on the building’s construction costs. Generally, you can claim 2.5% of the construction costs per year for up to 40 years from the date it was built.

Likewise, if you carry out renovation works, you can claim those costs in the future too (though they are not fully deductible in the same year you pay for it, but must be claimed in portions over several years).

-Plant and equipment: This depreciation covers fixtures, fittings and other parts of the building not associated with construction. Under this type of depreciation, you can claim wear and tear on things like ovens, air conditioning, carpets, showers and cupboards.
The bonus is that the cost of engaging a quantity surveyor for your depreciation schedule is also fully tax deductible.

Other expenses

Council rates and land tax on your investment property are tax-deductible, as are utilities, strata/body corporate costs and office/stationery costs associated with managing your portfolio.

Legal expenses directly related to the rental activity of your property are also tax-deductible. These could include costs associated with preparing lease documents, eviction notices, and going to court for rental disputes.

Special mentions

1. As of July 1, 2017, travel expenses for inspecting, maintaining, or collecting rent for a residential rental property are no longer deductible for individual investors. However, corporate taxpayers and certain entities can still claim these expenses.
2. When it comes to Capital Gains Tax (CGT), it may not be a deduction, but you will get a discount of 50% on the taxable gain when you sell your property, provided you have held it for longer than 12 months.

3. If you used a buyer’s agent to help purchase your investment property, the agent’s fees are not tax-deductible year on year, but if you do sell, the fees will be subtracted from the amount deemed to be a capital gain.