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Tax deductions you can and can't claim on a rental investment property

Your investment property can be a great source of income, but it does come with a lot of expenses. However, many of these can be claimed as tax deductions. Have you worked how much more you can save by claiming your expenses as tax deductions?

In this article, we’ll go through the many expenses that you can claim as tax deductions, and explain the few things you can’t claim so that you don’t get tripped up.

What tax deductions CAN you claim on a rental investment property?

1. Home loan interest

Home loan interest is a significant expense for property investors. The good news is that it is fully tax deductible, along with most standard loan fees. This is great news for investors with interest only home loans as they’ll be able to fully claim their repayments.

A low interest rate can save you a lot of money (regardless of the tax write-offs), so it’s smart to still prioritise finding a competitive rate.

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2. Negative gearing losses

Negative gearing is when your rental income is lower than your combined home loan repayments and relevant property expenses. These losses are tax deductible and are considered a short-term drawback for investors with a long-term plan. Many investors negatively gear their rental property with the vision to sell it and recuperate their losses once it increases in value.

3. Advertising for tenants

Unless you privately find tenants to fill your property, you may have to fork out some money to cover any costs associated with advertising for tenants. Luckily these costs, which can include agency fees and photography, are tax deductible.

4. Repairs and maintenance

You are legally obligated to maintain a safe property for your tenants. This will require you to organise for routine maintenance work (e.g. plumbing, some cleaning) and to attend to damage (e.g. mould, broken door handles).

These expenses are tax deductible, as long as they maintain or restore the original condition of the asset. For example, if you were to repair a damaged fence, you’d be required to use the same materials as the original for repairs. If you upgraded your damaged fence by installing steel planks, rather than the original timber, you’d be improving your property.

Improvements are changes made to the property that enhance its value or desirability. Improvements aren’t eligible for immediate tax deductions, but are still eligible for other tax benefits.

5. Depreciation on improvements and renovations

You may not be able to claim an immediate full tax deduction on your kitchen renovation or upgraded fence, but you’ll be able claim the decline in value as it depreciates. In order to do this correctly, you must organise a depreciation schedule with a Quantity Surveyor. This expense is tax deductible.

6. Property management or agency fees

If you hire a property manager or real estate agent to take care of your rental property and tenants’ demands, you will be able to claim these costs.

7. Other deductions available:

  • Council rates
  • Strata fees
  • Some legal costs
  • Insurance (including income protection)
  • Water, gas, electricity
  • Land tax
  • Garden maintenance (e.g. lawn mowing)

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What tax deductions CAN’T you claim on a rental investment property?

While there are many tax deductions you can make on your rental property, there are a few things you may be surprised to find you can’t claim. The ATO takes investment property tax very seriously and has substantial resources dedicated to maintaining compliance.

It’s important to get you tax right, so investors may benefit from speaking to a tax accountant. If you are making any depreciation claims, you will need to organise a depreciation schedule through a Quantity Surveyor.

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Here are some tax deductions you won’t be able to claim on your investment property:

1. Your principal loan repayments

You may be able to fully claim the interest expenses on top of your home loan, but you aren’t able to claim the principal repayments (i.e. loan amount).

2. Capital gains tax and capital losses

When you sell your investment property, you’ll either make a gain (i.e. profit) or a loss. Your gain or loss must be recorded in your income tax return, as part of your assessable income. If you make a gain, you’ll be charged capital gains tax (CGT) at a similar rate to your marginal tax rate.

You won’t be required to pay CGT when selling your primary place of residence or when you make a loss. Things like your original stamp duty payment can reduce your CGT liability. Read more about CGT and exemptions here.

Sadly, although your capital loss is not charged CGT, it won’t be a tax deduction from your assessable income. However, you can use it to offset capital gains in the future, but not other kinds of tax.

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3. Second-hand depreciating assets

There are limits placed on claiming the decline in value of second-hand depreciating assets in your rental property. Second hand assets are depreciating items that have been previously used by another entity, such as a used fridge you purchased online.

The main exception will be for investors who purchased the property before 7:30pm on the 9th of May 2017 and you installed the second-hand asset before 1st of July 2017. For example, if you purchased and installed a second-hand oven in January 2017, you’d be able to claim a tax deduction for decline in value.

4. Depreciation on assets installed by the previous owner

This is similar to the above point on second-hand asset depreciation. You won’t be able to make a tax claim for the declining value of any assets that were installed by the previous owner if you entered into a contract to purchase the property after 7:30pm on 9 May 2017.

Previously you were able to claim depreciation on plant and equipment items, which are classed as easily removable items like carpets, ovens and smoke alarms.

It’s important to mention that property investors CAN claim depreciation for the declining value of certain renovations done by the previous owner. You can claim depreciation for:

  • Structural work
  • Building structure
  • Substantial renovations

5. Most expenses when your property is not available for rent

Investment property owners can only make claims for periods when the property is genuinely available for rent or is being rented out. This means that while your property is sitting empty or being used for personal use, you can’t make any tax claims.

So, if your investment property is a holiday home, you won’t be able to make claims for anytime it is being used by the owners, family, friends (at a discounted or free rate) or times it is unavailable for rent. The ATO is serious about checking the validity of tax claims, especially for holiday homes.

Consider how you advertise your investment holiday home. By advertising it on a popular holiday lettings website, that provides a strong indication to the ATO that it is actually available for rent.

For regular long-term rental properties, if your property is unoccupied, it has to be seen as actually available in order to make claims. You can’t be unreasonably fussy with accepting and denying tenants as that indicates to the ATO that your property isn’t genuinely available for rent.

6. Expenses that you haven’t actually paid

We mentioned that you can claim standard expenses, such as water and gas bills, but this is only if you pay these charges. If your tenants are responsible for covering these costs, you are not entitled to claim these as deductions.

Similarly, you can’t double up on claims. For example, if your rental property is on a strata title, you’ll probably have to pay strata fees which are tax deductible. However, if your strata fees include gardening services, you won’t be able to make a separate gardening claim.

7. Interest expenses on a portion of the loan used for private purposes

If you refinanced to access cash from your home loan, you won’t be able to claim interest expenses if you use these funds for private purposes. For example, you can cash out part of your investment home loan to fund a new car or holiday, but this portion of the loan is not eligible for interest tax deductions.

8. Other fees

You likely won’t be able to claim the the following expenses as tax deductible:

  • Some legal fees
  • Acquisition and disposal costs
  • Costs to inspect the property before purchasing (e.g. building inspection)
  • Expenses related to personal use of the property

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, home loan, investment, investment property, investment loan, mortgage, home loan, capital gains tax

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