7 Most Overlooked Tax Deduction for Property Investment

These days, many property investors—and even some professionals—consider themselves property tax specialists. It’s easy to assume that property investment tax is straightforward, particularly if you own a single property with a simple loan structure. However, when you begin to expand your portfolio, add multiple properties, or introduce complex ownership structures, property tax can quickly become far more intricate.

In our experience at Investax, even professional accountants often overlook crucial deductions. This isn’t due to negligence but rather a lack of deep knowledge of the ever-evolving rules and regulations that allow property investors to maximize their claims. As a result, property investors miss out on valuable deductions that could significantly reduce their taxable income.

In this article, we aim to demystify some of the most commonly overlooked property tax deductions. Whether you’re a seasoned investor or just starting out, understanding these deductions can help you take full advantage of tax benefits and ensure your accountant is well-informed when handling your tax return.

1. Settlement Adjustments

It’s widely understood that fees related to the purchase of a property form part of its cost base for Capital Gains Tax purposes. However, this doesn’t apply to running cost adjustments made during settlement. Typically, expenses such as council rates, strata levies, and land tax are adjusted at settlement, ensuring the new owner pays their fair share of these ongoing costs. Unlike purchase-related fees, these adjusted running costs are immediately tax-deductible, as they are considered expenses incurred in the process of owning and managing the investment property.

Being aware of this distinction can help property investors avoid missing out on deductions they are entitled to claim right away, rather than mistakenly adding them to the property’s cost base.

2. Loan Interest

Claiming bank loan interest for your investment property seems straightforward, right? Not quite. While many investors and even some professionals assume this deduction is simple, there are nuances that can easily be overlooked. Let’s explore a few scenarios where the rules aren’t as clear-cut:

• Equity Loan: If you’ve taken out an equity loan against your primary residence to cover costs such as the deposit, stamp duty, or other expenses related to purchasing an investment property, the interest on this loan is tax-deductible. Even though the loan is secured against your home and not directly tied to your investment property, the purpose of the loan is what determines its deductibility. As long as the funds are used for investment purposes, you can claim the interest as a deduction.
• Family Loan: Borrowing money from family can complicate things, but it doesn’t exclude you from claiming tax deductions. If you’ve taken a loan from a family member—such as your parents—and you’re paying them interest, the interest may be tax-deductible, provided you have a formal loan agreement in place. The agreement must outline the terms of the loan, including the repayment schedule and interest rate, and must demonstrate that the loan is for investment purposes.
• Construction Loan: Since 2019, it has become common knowledge among investors and accountants that interest on a loan cannot be claimed if the property isn’t yet generating rental income. However, there’s an important exception: if you purchase a vacant block of land with the intention of building a rental property, you can still claim the interest on the construction loan while the property is being built, even though the property isn’t yet available for rent. Be mindful, though—interest related to the land itself, along with costs like maintenance and rates, cannot be deducted during this period. Only the interest specifically tied to the construction is claimable.

3. Borrowing Expenses

Many property investors either fail to claim borrowing expenses altogether or incorrectly claim them. Borrowing expenses are the fees associated with securing a loan, such as bank fees, legal fees, search fees, and Lenders Mortgage Insurance (LMI), incurred when borrowing money to purchase a property. While these expenses are tax-deductible, they cannot be claimed as an immediate deduction in the year they are incurred. Instead, they must be amortised over a period of five years or the term of the loan, whichever is shorter.

Another commonly overlooked mistake occurs when investors refinance their property. Many assume they can immediately claim the full amount of borrowing expenses from the previous loan upon refinancing. However, this is not allowed. The remaining borrowing expenses from the original loan must continue to be amortised over the original five-year period, even if the loan is refinanced.

4. Depreciation

The 2017 changes to the depreciation rules caused a fair bit of confusion, especially regarding what can and cannot be claimed. While it’s true that second-hand plant and equipment are no longer tax-deductible for residential properties, this doesn’t mean that you can’t claim depreciation for new items. For example, if you install a brand-new air conditioning unit, oven, or kitchen in your second-hand investment property, you are still eligible to claim depreciation on those new assets. Additionally, the special building write-off, which refers to the depreciation of the building structure itself, remains available for existing properties.

When discussing overlooked deductions for investment properties, the focus is usually on residential properties. Over the last five years, most changes in depreciation rules have affected residential investment properties, not commercial ones. However, many investors overlook the fact that commercial properties are still eligible to claim depreciation on second-hand assets. This is often missed because people rely on general information that doesn’t distinguish between residential and commercial property rules.

5. Land Tax 

Unlike other property-related expenses, land tax is tax-deductible in the financial year it is payable, not necessarily when it is paid. Due to the differing assessment timelines, this can create confusion for property investors. In Australia, the financial year ends on 30 June, while the land tax year runs until 31 December. This mismatch often leads to taxpayers forgetting to claim land tax in the correct financial year simply because they haven’t yet made the payment.

For example, if your land tax assessment is issued in January 2025 for the 2024 land tax year, but you don’t make the payment until July, you should still claim the deduction in the 2024 financial year, as that is when the liability was incurred. Failing to claim it in the correct year can lead to missed deductions, potentially impacting your tax position.

6. Repairs & Maintenance

It’s a given that property investors will need to repair or replace items in their investment property annually, or even undertake a major renovation at some point. However, many investors fail to claim repair work, mistakenly believing there’s no rush, assuming it will be depreciated over time. It’s important to know that certain repairs and replacements can be claimed as an immediate deduction, even if only part of the item is replaced. Being aware of what qualifies for an immediate deduction can help you maximise your tax return without unnecessary delays.

7. Other  

Travel Expenses – It’s well known these days that you can no longer claim travel expenses for inspecting residential investment properties. However, travel expenses related to inspecting or maintaining commercial properties are still tax-deductible, a benefit many investors may not fully utilise.

Insurance Premiums – Landlord insurance, which covers rental default, tenant damage, and other property-related risks, is also tax-deductible. However, many property owners overlook this important deduction when calculating their expenses, potentially missing out on valuable tax savings.

In conclusion, while property investment can offer substantial tax benefits, navigating the complexities of tax deductions is not always straightforward. From settlement adjustments and loan interest to depreciation and land tax, there are numerous opportunities to optimise your tax claims that are often overlooked—even by seasoned investors and accountants. Being aware of these overlooked deductions can make a significant difference in reducing your taxable income and maximising your investment returns.

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If you’re unsure about any of these deductions or want to ensure you’re getting the most from your tax return, reach out to the Investax Property Tax Specialists. Our expert team has the knowledge and experience to help you navigate the complexities of property tax and ensure you’re optimising your claims. Contact us today to take control of your property tax strategy and make the most of your investment portfolio.

Reference: 

ATO – Repairs and Maintenance Expenses