Investment properties aren’t just for high-flying suit-wearers or faceless conglomerates: anyone savvy with an eye for the market has bought investment properties.
The benefits of incorporating an investment property into your personal financial strategy can be great when carefully considered in relation to your income, expenses, and any existing debt.
Tax deductions can be claimed by investors against income earned from an investment property and other sources such as salary in order to manage expenses associated with leasing and maintaining an investment property.
Gearing Explained: Positive vs. Negative
If the expenses associated with renting out a property are less than the income you earn on it in a given year, the property is ‘positively geared’. In other words, you make money if you own and lease it.
A negative gearing investment home is one whose annual deductible expenses exceed the income it generates from renting it out. As a result, the government allows property investors to deduct their losses from other income, like their salary or additional investments, because property investors increase the supply of rental housing.
In order to improve housing affordability, these allowances are made for property investors. It is generally believed that an investor will keep rent lower if they can generate income through tax benefits over the long term from their investment, aiming to build the value of their asset over time to sell it later on. As a result, negative gearing is a popular method of managing investment properties.
Claiming Investment Property Tax Deductions
Any given financial year can result in a variety of costs for investors related to managing and maintaining their investment property. Depending on the length of time that the property has been rented out (or as long as it has been available for rent), you can deduct the following costs.
Fees for property agents
Property agents can manage your investment property and its tenants as part of their fee, which may also include advertising costs if you arrange these through them.
Maintenance and management of properties
You can claim everything from advertising your property for rent to cleaning, gardening, pest control, or strata fees if you live in a body corporate (do not claim maintenance fees twice if they are covered by strata). Your tenants are also required to pay utilities if they fail to do so – as often is the case with water supply.
Accounting, legal, and admin costs
A lawyer or accountant may be necessary for some aspects of investment property management. The fees they charge are deductible.
Using personal equipment such as your phone, internet plan, and stationery to manage your investment property can be claimed on tax. But make sure you only claim what is related to property management.
Land and council tax
When your investment property is rented out, you can claim land tax, council tax, and water rates. If the building wasn’t occupied, then you can’t deduct taxes and rates. Be sure to check the state or territory you live in for land tax deduction rules and timing for claiming costs.
Property maintenance repairs
Your home’s repairs can be deductible immediately, but they must be separate from improvements or renovations that are considered to increase its value. It’s deductible to fix a leaking ceiling right away, but not to retile the entire roof.
A home loan’s interest
In some cases, an investment property owner may have to deduct the most significant amount of tax from their mortgage. You must have purchased the property with the intent of renting it out as an income-earning asset if you want to claim mortgage interest payments on your tax return.
Buying a property for both owner occupation and investment may involve renting out part of it if there is a granny flat or spare room. The income-earning portion of the property must be deducted from interest payments. This can be quite complicated if you share the space with a roommate, so you should seek expert advice.
Property management education
Tax deductions can be claimed for educational seminars or courses regarding investment property management.
Insurance
When you purchase a property, it’s advisable to take out home insurance that covers its structure so you’re financially protected in case your home is damaged by an unforeseeable event. An investment property owner can claim this on tax, including landlord insurance. Home insurance variations cover additional potential costs such as lost rental income and intentional damage caused by tenants.
Investment Property Tax Deductions You Can Claim Over Time
Investment property expenses may need to be claimed over a longer period than the amount incurred in a given year.
Property and appliance depreciation
A major investment property deductible is property depreciation, which can be claimed across two categories: general wear and tear, and depreciation on improvements.
The assets in Division 40 are classified as ‘plant and equipment’, which includes carpets, dishwashers, and air conditioners that are easily removable.
Capital works are Division 43 assets, including the structure of your home and any permanent fixtures, as well as improvements or additions you make to your home (like adding a room). It is important to check the Australian Taxation Office (ATO) depreciation and capital allowances tool to find out how many deductions you qualify for capital works based on the date your investment home was built or renovated.
Expenses associated with borrowing
Taking out a loan over a five-year period for the purchase of a property can be recouped by property investors. A home loan application fee, property valuation fee, and lenders mortgage insurance (LMI) are not considered as part of this tax deduction.
Investment Property Tax Claims: What Can’t You Claim?
As a property investor, you can’t claim certain costs. These include:
Property stamp duty
Fees associated with purchasing the property (such as legal and conveyancing fees)
Renovations or repairs you make immediately after purchase (before tenants move in)
Inspected property travel expenses
Bills tenants have paid
Borrowing costs incurred for personal use
Expenses incurred when personally using the property
Advertising, legal and conveyancing fees, agent fees, and reports related to selling investment property
Expenses incurred during unrentable times