Tax Deductions for Property Investors: and other tax tips

With any investment, it's important to ensure you're maximising your returns. Reducing your tax liability is an essential part of maximising your net returns when it comes to investment properties. We take you through key financial aspects of owning investment property.

Taxable Income to Declare on Investment Properties

All income earned from each property must be declared. If you have multiple properties, keep the records for each property separate to make your tax return more efficient.

Below is a list of the types of income that must be declared:

• Rental income. Rent received, whether paid directly to you or through an agent or an online management platform, must be declared. Rent includes recurring regular amounts as well as any lump sum amounts paid in advance.
• Rental bonds retained. If a tenant causes damage or defaults on rent payments and you keep their rental bond, this counts towards your assessable income.
• Insurance payouts received as compensation.
• Expenses reimbursed by the tenant, for example if they have caused damage and you have paid for the cost of fixing the damages, or if they have reimbursed you for water.
• Extra fees received, for example letting or booking fees.
• Government rebates, for example for installation of solar utilities.
• Capital gains. If a profit is made when you sell a property, Capital Gains Tax (CGT) may apply. If the property is sold within 12 months of ownership, the profit from the sale is subject to full CGT. If you hold the property for over 12 months before selling, you qualify for a 50% CGT discount. This means that only half of the capital gain needs to be included in your tax return.

You will need statements or recipient created tax invoices from agents or management platforms and documents for all other payments received.

Investment Property Tax Deductions

Below are some expenses you may be able to claim to optimise your investment property deductions. These costs are simple to keep track of as you'll receive a tax invoice or receipts for payments relating to the tax deductible expense.

• Advertising expenses to help you find tenants.
• Body corporate fees.
• Council rates.
• Water supply charges.
• Land tax.
• Cleaning, gardening, pest control and property maintenance.
• Insurance premiums (including lenders mortgage insurance and landlord insurance).
• Property agent fees.
• Repairs and maintenance.
• Some legal expenses.
• Bank fees.

Other deductible expenses that require calculation

Some tax deductible expenses incurred will require calculations to determine the amount you are eligible to claim.

Loan interest

Your bank statements will show your loan repayment amounts paid, as well as the interest charged each month. If you have a loan used purely for investment purposes (an investment loan or mortgage for your investment property), you can simply claim the sum of the interest expenses over the reporting period. It's a good idea to keep your personal loans separate to investment loans, as any interest incurred on personal loans is not tax deductible — you can claim interest for your investments only.

For example, if you refinance an investment property mortgage and use some of the funds to purchase a caravan for your upcoming holiday, the portion of the interest expense relating to the caravan will not be tax deductible.

Depreciation

Investment property depreciation is a tax deduction associated with the decline in value of the property due to the natural wear and tear of your investment property. Claiming depreciation deductions is not as simple as recording expenses, as it's a non-cash deduction and needs to be calculated based on a few different metrics.

Depreciation is calculated differently depending on whether certain elements of the property are classified as capital works or plant and equipment assets.
Capital works deductions (or building allowance) entail the depreciation of the building's structure and fixed assets like walls, roofs, and plumbing. Investors can claim deductions for capital works spread over 40 years at a rate of 2.5% annually.

Plant and equipment depreciation relates to the devaluation of removable assets within the property, such as carpets, appliances, and window coverings. The depreciation rates for each individual asset is the determined by the ATO, based on the assets effective life.  

To correctly and compliantly claim depreciation deductions, it's essential to have a tax depreciation schedule prepared professionally for each rental property.

Investment Property Expenses You Can't Claim

Some expenses cannot be claimed. These include stamp duty, loans and repayments, some legal expenses and some insurance premiums.

Get Help to Simplify Your Property Records

Tax matters for property investors can be complex. The Australian Taxation Office (ATO) keeps a close eye on tax returns that involve property investment, as it's easy to make mistakes. There are other matters to consider such as the period of rental availability, private use of the property, legal contracts and positive or negative gearing.

We'd love to help ensure you are claiming the right deductions to make the most out of your investment property this year and beyond.

How we can help?

If you need more advice on claiming an investment property tax deduction, please contact our team.

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