How Does My Investment Property Affect My Tax Return?
If you have purchased your first investment property in the 2019-2020 financial year, it may seem like tax time just got a whole lot more complicated.
But while it may be a bit trickier for you, it’s child’s play for an accountant, so if you haven’t used one previously, it’s a good idea to do so now.
An accountant will prepare and lodge your tax return for you in Australia for a fee of between $75 and a few hundred bucks, depending on who you go to and how complex your finances are.
The good news is that their expert knowledge will mean your initial outlay is worth it and will pay for itself in deductions you didn’t know you were eligible for.
An accountant’s fee is also fully deductible in the following year’s tax return, so it’s a no-brainer.
Once you have that sorted, you can enjoy the fact that after an expensive year outlaying money for a deposit (plus legal fees, stamp duty and other costs associated with a property purchase), tax time is when you start to see the benefits and get some money back.
The main deduction for property investors is the interest charged on the home loan.
Most seasoned investors take out interest only loans, so they can accumulate equity and use it for further investing, without being encumbered by having to pay down the property’s principal value.
Over the years they can use periodic rent increases to eventually pay down the principal too and remain positively geared.
Interest paid on an investment property’s home loan is fully tax deductible, along with accompanying bank charges, so even though interest rates are currently at historic lows, interest paid will be a chunk of money come tax time.
Hopefully by now, you also have tenants in your property. If you had to spend money advertising the place for lease, paying agent’s fees, ongoing property management costs and other administration expenses, these are all deductible.
Holiday’s over: Until recently you could claim expenses incurred while travelling to and from your investment property for the purpose of conducting inspections. This was particularly nice if your property happened to be in a far flung tropical climate you could enjoy while you were there.
Unfortunately, too many people may have been writing off their holidays, because the Federal Government put an end to deductible travel expenses.
If you have already been forced to fork out your hard earned to cover repairs and maintenance work such as pest control, plumbing, gardening and deterioration of fittings (extremely common unless you buy brand new), these expenses can be claimed.
However, if you have done work to improve a property, such as add a new bathroom or kitchen rather than just restore it to its original state, you cannot claim.
Keeping your investment safe requires an outlay on landlord’s insurance, which covers damages caused by tenants, water damage, loss caused by theft or burglary and in some cases loss of rental income (COVID 19 has seen some insurers remove this feature).
Usually deductions are expenses occurring in the taxable financial year. Depreciation however covers the long term decline in the property’s assets, which are either part of the building’s structure (external walls, fittings), or what is inside (appliances, curtains, carpets, etc).
The rules have changed for depreciation on established properties purchased after May 9, 2017 and there are limitations on what can be claimed.
Depreciation is a complex field, which may be why the ATO requires you engage a professional quantity surveyor to help.
Quantity surveyors undertake an inspection and provide you with a depreciation schedule outlining all available deductions. This schedule can be used year after year. Most quantity surveyors guarantee that deductions found will more than cover their fees, which are tax deductible anyway.
If you would like to get some help maximising the earning potential of your investment properties, please contact our team for a free property review.