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Investment Property Deductions: Expenses You Should Claim With Caution

Investment Property Deductions

The majority of property owners in Australia purchase investment properties because they offer both capital appreciation and a steady income stream in the form of rental income. According to the latest ATO data, over 2.2 million Australians own at least one investment property. This shows that the ATO not only keeps track of income and expenses for investors but also tracks the number of properties owned by investors and the number of losses claimed by each investor. As the government is investing in technology and systems, it is more important than ever that we understand what we are claiming against our rental property income.

As the ATO allocates more resources to investigating investment property expenses, they have found that many investment property owners frequently claim incorrect expenses annually. While the majority of us want to do the right thing when it comes to claiming deductions for investment property, the expense claims are not as straightforward as everyone thinks. We have heard many experts saying that any expenses related to your investment property are tax-deductible. Unfortunately, that is not the case. Please feel free to read our article on “Common Property Expenses You Cannot Claim” to understand that even though some expenses are directly related to your property, you cannot claim them against your income tax.

There are mainly three categories of expenses related to investment properties:

  1. Non-Deductible Expenses
  2. Deductible Expenses
  3. Depreciation or Amortization Expenses

We have already discussed non-deductible expenses in detail in our previous article. You can click the above link for a quick read if you want to know more about these expenses. In this article, we will focus on deductible expenses available to property investors.

Investment Property Deductions
Expenses that qualify for an immediate deduction are known as deductible expenses.

Deductible Expenses 

Expenses that qualify for an immediate deduction are known as deductible expenses. Understanding these expenses is crucial, which is why the ATO invests considerable effort and resources in scrutinising how taxpayers claim them.

Deductible expenses, also called immediate deductions, serve to reduce the rental income generated by the investment property. If your rental income is lower than the total deductible expenses, the property operates at a loss, commonly referred to as negative gearing.

Some expenses are straightforward, while others are not. As taxpayers, it’s crucial to be aware of these expenses. Even if you have a tax accountant, you should discuss any unusual transactions in your property expenses with them.

The common expenses are – 

  • advertising for tenants
  • bank charges
  • body corporate fees and charges
  • cleaning
  • local council rates
  • electricity and gas
    • annual power guarantee fees
  • gardening and lawn mowing
  • in-house audio and video service charges
  • insurance
    • building
    • contents
    • public liability
    • loss of rent
  • interest on loans
  • land tax.
  • lease document expenses for
    • preparation
    • registration
    • stamp duty
  • legal expenses (excluding acquisition costs and borrowing costs)
  • mortgage discharge expenses.
  • pest control
  • property agent’s fees 
  • quantity surveyor’s fees
  • costs incurred in relocating tenants into temporary accommodation if the property is unfit to occupy for a period of time.
  • repairs and maintenance
  • cost of a defective building works report in connection to repairs and maintenance conducted.
  • secretarial and bookkeeping fees
  • security patrol fees
  • servicing costs, for example, servicing a water heater.
  • stationery and postage
  • telephone calls and rental.
  • tax-related expenses.
  • travel and car expenses to the extent that they are deductible.
  • water charges.

You can claim a deduction for these expenses only if you actually incur them and they are not paid by the tenant.

You may be eligible to claim a capital works deduction.

Tricky Tax Deductions 

Body Corporate fees are typically tax deductible if they are related to your investment property. However, if the body corporate raises a special levy to fund certain types of construction costs, you won’t be able to claim a tax deduction for the special levy. Instead, you may be eligible to claim a capital works deduction. This deduction can only be claimed once the work is completed, and the cost has been charged to either the special purpose fund or the general-purpose sinking fund, if a special contribution has been levied. 

Land Tax is a state-imposed tax levied once you surpass the land tax threshold set by your respective state. If you receive land tax assessments in arrears, the amount of land tax isn’t deductible in the income year you pay the arrears. Instead, the land tax amounts are deductible in the respective income years to which the liability for the land tax relates. In other words, you can only claim deductions for land tax in the years to which the tax liability corresponds, not necessarily in the year you actually pay it.

Let’s use an example with John’s situation:

John recently moved to a new house, and his land tax assessment notices were sent to his previous address. Unaware that he had land tax obligations for the years 2021, 2022, and 2023, he only discovered this when he decided to sell his property in 2024 and needed a land tax clearance certificate. Realizing his oversight, he promptly paid the outstanding land tax for the past three years in 2024.

Now, the question arises: Can John deduct the total land tax paid for the last three years in 2024? The answer is ‘No’. He must claim the land tax expenses in the respective tax years to which the liability relates. In other words, John needs to claim the 2021 land tax amount in his 2021 tax return, the 2022 land tax in his 2022 tax return, and so forth. Deducting all the past land tax payments in 2024 would not be permissible under tax regulations.

Legal Expenses we commonly see are related to the purchase and sale of investment property, which are capital in nature and not tax deductible in your tax return, certain legal expenses are indeed deductible. These may include the costs associated with evicting a non-paying tenant, initiating court action for the loss of rental income, and defending against damages claims for injuries sustained by a third party on your rental property.

Mortgage discharge expenses are the costs of ending a mortgage, excluding principal and interest payments. You could deduct these costs in the year you incur them if you took out the mortgage to borrow money for your rental income. For instance, if you used a property for both rental income and personal use, only half of the discharge costs are deductible.

These expenses may also include penalty interest payments made to a lender for early repayment of a loan on a rental property. 

Repairs and Maintenance are tax deductible for investment properties as long as the property remains rented out or genuinely available for rent when unoccupied. The cost of repairs may still be tax deductible even if you no longer rent the property. However, you can only do this under certain conditions:

  • The repair is necessary due to wear and tear that occurred during the tenancy period, and the property was earning rental income.
  • The property was income-producing in the income year in which the repair costs were incurred.

Repairs and maintenance are among the most common expenses taxpayers make mistakes with during annual tax claims. General repairs directly related to wear and tear or other damage resulting from renting out the property are tax deductible. According to the ATO, “Repairs generally involve a replacement or renewal of a worn-out or broken part, for example, replacing worn or damaged curtains, blinds, or carpets between tenants. Maintenance generally involves keeping the property in a tenantable condition, for example repainting faded or damaged interior walls”.

The following are examples of expenses that will not fall under immediate deduction: 

  • Replacement of an entire structure or unit of property (such as a complete fence or building, a stove, kitchen cupboards, or refrigerator) 
  • Improvements, renovations, extensions, and alterations 
  • Initial repairs – for example, remedying defects, damage, or deterioration that existed at the date you acquired the property.

Example of initial repairs – John recently purchased a property. He needed to do some repairs to his newly acquired rental property before the first tenants moved in. He paid a renovation specialist to repaint dirty walls, replace carpet, and repair doors in 2 bedrooms. Later, he discovered that the kitchen sink gets clogged up, so he may have to change some of the pipes under the sink. During this period the property was advertised for rent; however, it couldn’t be rented until the tradies left the property after completing the jobs. 

These expenses were incurred to make the property suitable to be rented out and did not arise from John’s use of the property to generate rental income. The expenses are capital in nature, and John is not able to claim a deduction for these expenses.

You cannot claim decline in value for second-hand depreciating assets.

Expenses deductible over several income years

There are three types of expenses related to your investment property that can be claimed over several years. These expenses are:

  1. Decline in value of depreciating assets.
  2. Capital works deduction.
  3. Borrowing expenses

Quantity surveyors perform calculations for both 1 and 2 when you purchase your property. 

Assets Costing $300 or less qualify for an immediate deduction provided it is purchased for your investment property. To qualify for this deduction, the asset should not be part of a set costing over $300 or one of several similar items that together exceed $300. Additionally, if you hold the asset jointly and your individual share is $300 or less, you can still claim the deduction even if the total cost of the asset is above $300, ensuring the asset is utilised mainly for income-producing activities. 

Suppose you and two partners jointly purchase a printer for $900 to use in a shared rental property office. Each of you contributes $300 for the printer. Despite the total cost of the printer being over $300, because your individual share is exactly $300, you can claim a full deduction for your $300 share in the year of purchase. This is allowable even though the combined expense exceeds the $300 threshold, as long as the printer is used primarily for generating rental income.

Second-hand Assets in residential properties are no longer eligible for depreciation deductions for tax purposes. You cannot claim decline in value for second-hand depreciating assets that were installed and used by a previous owner for your residential investment property. This rule applies to residential properties purchased after July 1, 2017.

For example, you have purchased an almost brand-new residential property. The construction was completed about 8 months ago, and the previous owner only lived in the property for 6 months. You rented it out as soon as the property was settled. Unfortunately, you cannot claim any depreciation expenses for your fixtures and fittings, even though they are just 6 months old, because the depreciating assets became second-hand.

If you on the other hand, acquire a newly built residential property from a developer, or buy a residential property that has been substantially renovated, you can claim a deduction for a decline in value of a depreciating asset in the property. 

Borrowing expenses are the expenses directly linked to or incurred in taking out a mortgage or loan for a property purchase. If your total borrowing expenses exceed $100, you must amortize them over 5 years, provided the loan term is longer than 5 years. If the loan term is less than 5 years, you can amortize them according to the terms of the loan. If the loan term exceeds 5 years but you repay the loan early in less than 5 years, you can claim a deduction for the remaining balance of the borrowing expenses in the year the loan is fully repaid.

The loan related expenses are: 

  • loan establishment fees.
  • title search fees charged by your lender.
  • costs for preparing and filing mortgage documents.
  • mortgage broker fees.
  • stamp duty charged on the mortgage.
  • fees for a valuation required for loan approval.
  • lender’s mortgage insurance billed to the borrower.

As we’ve highlighted, the ATO is increasingly focusing on audits for investment properties, underscoring the need for precise tax compliance. This article hopefully provided great insights into what can be legitimately claimed on your tax returns. For a deeper understanding, feel free to read our previous article on “Common Property Expenses You Cannot Claim,” which further clarifies what expenses are off-limits.

Navigating the tax implications of investment property expenses can be daunting, yet it is crucial for maximizing your returns and ensuring compliance with ATO regulations. Whether you’re determining the immediate deductibility of maintenance costs or the amortisation of borrowing expenses, each decision can significantly impact your financial outcomes.

At Investax Group Tax Specialist, we are dedicated to guiding you through these complexities. Our expertise in property-related tax planning ensures that you leverage every allowable deduction to optimize your investment. Don’t navigate these waters alone; reach out to Investax Group Tax Specialist for personalized assistance and ensure that your investment property expenses are managed wisely and efficiently. Contact us today to see how we can help you with your investment property expenses or any tax planning needs you might have.