What is deductible and what’s not for property investors?

Many expenses relating to investment properties are tax deductible. With the end of financial year in sight, property investors should be planning to maximise their property investment tax deductions. By claiming the available tax deductions, your rental profit can reduce and ultimately reduce your taxable income.

Deductions apply for any property you own that is available for rent, hence excluding your home or personal holiday accommodation. Listing with agents can help prove your properties are available for rent as the proper documentation will be in place.

Below is a list of items which you can claim as deductions against rental income this year which are either deductible immediately or after a few years of owning the property. Further below is a list of items that are not deductible, and usually questioned by the ATO. This will assist you in compiling your information and make it easier to prepare your income tax return. You can also use this information to improve your decisions in relation to managing your investment properties.

DEDUCTIBLE – Immediately

Expenses relating to the maintenance and management of your investment property, including interest on loans, can generally be claimed immediately, against your current financial year’s income.

Property Management & Maintenance Expenses

  • Advertising for tenants – directly by you or where the agent charged you
  • Body corporate fees or Strata Title fees and charges (Special levies for capital works on a building can only be depreciated at 2.5%)
  • Cleaning
  • Gardening/Lawn Mowing
  • Pest control
  • Security patrol fees

Rates & Taxes

  • Water rates, charges & usage
  • Council rates
  • Land tax – first time owners have to lodge an initial land tax return with the Office of State Revenue in each state. They will not chase you up and they will charge additional interest for late lodgement, so you must initiate this

Property Agent

  • Fees/commissions – including GST
  • Postage & petties
  • Statement fees
  • Bank charges/fees
  • Lease document expenses
  • Letting fees

Administration Expenses

  • Stationery used to maintain your rental records
  • Postage on documents relating to property management
  • Telephone calls relating to property management – ATO prefers to see a diary
  • Legal expenses relating to debt collection or tenant problems
  • Electricity & gas – where not covered by tenant

Insurance

  • Landlords
  • Building
  • Contents
  • Public liability

On Acquisition – from the solicitor’s settlement letter

  • Balance of council rates
  • Balance of water rates
  • Balance of body corporate fees

Repairs & Maintenance

  • Plumbing
  • Electrical
  • Handyman

Repairs and maintenance relate to wear and tear or damage as a result of renting out the property. The idea is that an expense is considered a repair when the functionality is being restored.

For example – fixing broken glass on a window is considered a repair, while replacing the whole window frame is an improvement. Renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. These falls under building costs, and are usually deductible at 2.5% per year for up to 40 years.

Repairs made immediately after purchase of the investment property or maintenance to make the property suitable for rental are considered to be of a capital nature – part of the cost of the property and can be depreciated. They are not deductible as the ATO considers the lower price of the property reflects its state of disrepair.

The ATO is particularly vigilant to catch people who are claiming expenses described as repairs when they are considered to be improvements.

Interest & loan account fees on loans to finance investment properties

  • For the interest to be deductible the loan must have been applied to acquire an income producing asset e.g. rental property
  • Where loans used for both investment property and private assets the interest has to be apportioned based on how much of the principal was used for which purpose. This usually happens when people are using a Line of Credit facility.

Travel expenses to

  • Inspect property
  • Maintain property
  • Collect rents

A full deduction can only be claimed if the sole purpose of the trip relates to the property. Where the inspection is combined with a holiday, expenses must be apportioned.

Cost of preparing a Quantity Surveyor’s report showing

  • Depreciation expenses
  • Special Building Write-off

Seminars

  • Cost of attending property investment seminars – only to the extent that they relate to operating or maximising the return on currently owned properties

Where money is spent on relevant seminars before any property is acquired, there will be no deduction available.

DEDUCTIBLE – Over a number of years

Borrowing Expenses

  • Loan Application fee
  • Lender’s legal fees
  • Title search fees
  • Lenders mortgage insurance
  • Stamp duty on mortgage
  • Mortgage registration fees

These are deductible over the period of the loan where the loan is less than five years. Otherwise deductible over five years.

Depreciation on Plant & Equipment (decline in value of depreciating assets)

  • Carpets, vinyl, linoleum and other removable floor coverings
  • Hot water systems, heaters and solar panels
  • Air conditioning units
  • Blinds and curtains
  • Light fittings
  • Swimming pool filtration and cleaning systems
  • Security systems

Depreciation on the building construction (also called Capital Works Deduction)

  • Your total capital works deductions can’t exceed the construction expenditure. No deduction is available until construction is complete.

Set of assets

  • To be depreciated in accordance with their effective life.

For assets costing $300 or less, you can claim an immediate deduction for the entire cost. You can’t do this if the asset is one of a set of assets that together cost more than $300, making it a deduction over a number of years, for example, if you buy four dining chairs each costing $250, you can’t treat them as separate assets to claim an immediate deduction. Note that if you only rent your property for part of the year you will not be able to deduct the full amount of your expenses.

NOT DEDUCTIBLE

The following items are either not deductible or considered to be of a capital or private nature by the ATO.

On Purchase

  • Purchase price
  • Stamp duty on purchase
  • Legal/conveyancing fees
  • Pest & Property inspection
  • Sourcing Fee
  • Renovations immediately after purchase
  • Repairs immediately after purchase

On Sale of a property

  • Legal/conveyancing
  • Advertising
  • Agent fees

Pre-Purchase expenses including (especially if property was not then purchased)

  • Attending seminars to acquire more property
  • Cost of reports on property prior to purchase
  • Travel to inspect property prior to purchase

Always remember to keep proper records in order to make a claim, regardless of whether you use a tax agent to prepare your tax return or you do it yourself.

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