With the end of the financial year fast approaching, it’s important to maximise the legitimate tax deductions for your investment property.
To do that, you need to understand what you can and can’t claim.
Tax-deductible expenses on investment properties can generally be grouped in four categories:
- Borrowing expenses
- Property management costs
- Repairs and maintenance costs
Your borrowing expenses
The major borrowing cost for your investment property will usually be the interest on the loan you used to buy it or to finance renovations or major repairs.
There can also be associated borrowing expenses besides interest, such as:
- Loan establishment fees
- Ongoing loan fees
- Mortgage broker fees
- The cost of preparing and filing mortgage documents (e.g. by a solicitor)
- Lenders mortgage insurance
Your property management costs
Investment property management costs can include expenses such as:
- Advertising for tenants
- Council rates
- Property management fees
- Accounting/tax agent fees
- Land tax
- Body corporate fees and charges (for units/apartments)
Investment property expenses are considered repairs if they involve a replacement or renewal of a broken or worn out part while (or after) the property is rented to tenants. For example, replacing the following items:
- Damaged guttering
- Broken light fittings, tiles or windows
- Electrical appliances or machinery
- Tap washers and fittings
Maintenance is preventing or fixing deterioration. For example:
- Gardening and lawn mowing
- Pest control
If your investment property is a unit or apartment, repairs and maintenance costs usually come out of a common fund that you contribute to. You can claim the amount of your contribution for any such expenses that arise.
It’s important to note that if you receive an insurance payout for the cost of any repairs, you must include this amount as income in your tax return, along with claiming the associated tax deductions.
It’s also important to understand the difference between repairs and maintenance costs and renovations/improvements. Examples of renovations/improvements include:
- A new kitchen, bathroom or extension
- Adding or removing an internal wall
- Adding a carport, driveway, fence or retaining wall
Renovations/improvements are classed as capital improvements for an investment property and are treated as capital works expenditure. Unlike repairs and maintenance costs, renovation/improvement expenses cannot be claimed as full tax deductions in the financial year that they occur. Instead, 2.5 per cent of these costs can be claimed each year for 40 years from the date the construction is completed, provided the property remains available for rent.
Plant and equipment depreciation
If you purchased your investment property before the 9th of May 2017, you can claim depreciation for plant and equipment assets. If purchased after this date, you can only claim for plant and equipment if you installed these new assets yourself, or if the property was brand new when you bought it (not second hand).
A depreciating asset is defined by the Australian Taxation Office as being one that has limited life expectancy and can reasonably be expected to decline in value over the time it is used. They are standalone functional units that are generally not fixed to the property.
Examples of investment property assets that you could depreciate include:
- Air conditioners, heaters and solar hot water systems
- Solar panels (however any rebate you receive for installing these panels would need to be included in your assessable income)
- Kitchen and laundry appliances
The full depreciation on an asset costing $300 or less can be depreciated in its first year of use. However, the depreciation on assets with a value over $300 must be claimed over the asset’s estimated useful life.
What you can’t claim
While it’s important to understand all the expenses you can claim so you can legally minimise your tax bill, you also need to understand the ones you can’t claim. These include:
- The purchase price of the property (including government stamp duty costs and building inspection costs). However, these costs form part of the cost base of the property when calculating your capital gains tax (CGT) obligations if/when you sell it in the future.
- Any expenses that are paid by your tenants (like electricity or gas charges).
- Travel to your investment property (e.g. to inspect it, collect rent or perform maintenance), unless you are carrying on a property investing business. It’s important to note that this expense was an allowable tax deduction prior to the 2017/18 financial year, but it is no longer available
- Any expenses relating to your personal use of the property. For example, if you used your investment property yourself for a holiday for part of the year, you would need to allocate (and not claim) a portion of your total expenses to reflect this private use period.