Property Investor’s Guide to Tax Time
INVESTING IN PROPERTY OFTEN COMES WITH A NUMBER OF TAX ADVANTAGES:
But what exactly are they? How do they work? And most importantly, are you making the most of them this tax time? Find out more in our blog below.
The biggest deduction: interest on your home loan
If you have a mortgage on your investment property, by far the biggest deduction you can usually claim is the cost of any interest you’re paying. You can offset this loss against your income for the year. You can also usually claim any bank fees associated with the home loan. You can’t, however, deduct repayments you make towards the loan principal.
Where the loss you’re making on your interest repayments and other costs is more than the income you receive in the form of rent, it’s known as negative gearing. While this strategy has its critics, it can be a tax effective way to build your wealth because you’ll be minimising tax while taking advantage of any capital growth in the property.
Depreciation: an underused tax break
Depreciation is the decline in value of the assets you own. As a property investor, there are generally two types of depreciation which you may be able to claim - but few investors really make full use of them:
Capital works. This is any fall in the value of the property’s permanent assets, including the cost of the property itself. If your property was built after 15 September 1987, you can usually claim a capital works deduction of 2.5% a year for up to 40 years. For properties built before then you can only claim depreciation on renovations and structural changes.
Plant and equipment. This is the fall in the value of fixtures and fittings that aren’t part of the property, such as curtains, carpets, dishwashers and air conditioning.
To claim depreciation, you’ll need a tax depreciation schedule. This isn’t something you can draw up yourself - you will need to hire a quantity surveyor, but don’t worry, their fee is deductible too.
The quantity surveyor will inspect your property and itemise all your depreciating assets. You can then give it to your accountant to claim this using one of two methods: prime cost (which involves deducting the same amount of an item’s value each year over an asset’s life); or diminishing value (which involves claiming more upfront and less each year as the asset ages).
Property management costs: it pays for itself
While some landlords may be tempted to save money by renting out a property themselves, this can often be a false economy. After all, you can claim all the costs associated with the day-to-day management of your property as well as any advertising and legal fees.
That means our costs as property managers are usually entirely tax deductible. You can also claim legal fees for preparing any commercial/retail leases.
Repairs and maintenance: you may be able to claim these
It’s possible to claim certain types of repairs and maintenance. If you need to restore your investment property to its original condition - say a wooden fence falls over and you pay someone to fix it - you can usually claim the total cost. But, if you go beyond this, or use better materials - like replacing the wooden fence with a brick one - the ATO is likely to categorise it as an improvement. When this happens, you can only usually claim depreciation rather than the total cost.
Other associated costs
There are also other costs you can usually claim for your investment property, including:
Insurance: you can claim the cost of home and contents insurance, public liability and landlord insurance
Strata fees: you can claim regular body corporate fees, such as admin levies and general purpose sinking funds. However, special works contributions are also treated as depreciation, so you can’t claim them all in one go
Council rates and land tax: These are also often deductible
What can’t you claim?
Just as important as knowing what you can claim, is knowing what you can’t. You can’t claim any personal expenses, including travel expenses. You also can’t claim the costs associated with buying or selling the property, such as conveyancing fees and stamp duty.
Do you need to pay capital gains tax (CGT)?
You usually have to pay CGT on any profit you make if you sell an investment. For example, if you bought an investment property for $300,000 and it’s now worth $500,000, your capital gain is $200,000. The good news is that the ATO provides a 50% CGT discount if you’ve owned a property for longer than 12 months. So in this scenario, you’d only have to pay CGT on $100,000.
There’s no fixed rate for CGT. Instead, the profit gets added to your income for the financial year in which you sell the property and then you pay tax at your marginal rate. If you own the investment property jointly with someone, such as your spouse, the profit usually gets split between you.
If, on the other hand, you sell your investment property for a loss, you can usually deduct this too. So, if in the same scenario, you and your spouse sold the property for $100,000 less than you bought it, you should both be able to claim a $50,000 deduction against your income for that financial year.
And finally…
While claiming deductions can be one of the real benefits to owning an investment property, the ATO watches property investors’ claims carefully and is likely to come down harshly on you if you get it wrong. For that reason, it’s always important to keep any receipts and, most importantly, to use a good accountant to help you maximise your tax advantage. And, like any financial decision - it pays to seek professional advice specific to your situation.
