Rental property tax deductions guide

The key question for property investors when buying property is ‘what can I claim as a tax deduction?’ There are several rental property tax deductions. ATO guidelines provide some indication of what you can claim.

What expenses can be claimed

The expenses that you can claim fall into two categories, relating to the cost of maintaining and managing the property and the depreciation of assets. How you claim for each varies. You can usually lodge claims for maintenance and management immediately. You’ll claim over several years with ongoing costs, such as asset depreciation.

Maintenance and Management Expenses

• Several expenses fall under the maintenance and management banner. These include the following:
• The fees you pay to any property managers
• The cost of your insurance premiums
• Any advertisements that you take out to attract new tenants.
• The rates you pay for water and to the council.
• Travel expenses are incurred when you inspect the property.

Is interest on a home loan tax deductible?

Many people build this deductibility into their loan repayment efforts. You can claim the interest on your mortgage, giving you some leeway for handling personal debts. You can use the correct management to improve your credit score. This sets you up for later investments.

Depreciation of Your Assets

Your investment property will usually contain assets. This may include furniture or even some shared assets if you have a unit in an apartment block. These assets lose value over time. As a result, they depreciate. However, you can make claims against this depreciation.

You’ll need a Quantity Surveyor. These professionals visit your property and take stock of every asset that you have. They’ll then create a depreciation schedule. This works out how much you can claim for each asset every year. The best depreciation schedules also break your assets into short and long-term claims.

Beyond this, you can also claim for rental property capital works deductions. This covers most modifications to your building and any construction work. Again, you’ll claim this work over several years.

For example, you may be able to claim construction work at a rate of 2.5% for 40 years. However, this is only possible for properties built after a specific date.

You won’t maximise your tax deductions without the proper schedules for each. Australia also has several rules for you to follow when claiming depreciation over a long period. Speak to a qualified professional to ensure you don’t make mistakes.

What Do I Need to Make Claims?

Documentation is the key to making successful claims for tax deductions. Australia has strict rules in place. You can’t make the deduction if you can’t prove the claim.

• Keep a record of any official documents that relate to the property. This includes any receipts for work carried out and your bank statements. Also, keep records of any construction work undertaken. You’ll need these to show that you’re making legitimate claims.
• You’ll also need a property tax depreciation schedule, which you can create with a Quantity Surveyor. Have a new schedule created whenever you replace or repair an asset. This ensures you maximize your deductions rather than claiming for old assets that you no longer use.

What you cannot claim

It’s also important that any claims you make follow these conditions:

• They’re made during periods when the property is being rented or is available to rent. You cannot claim the above expenses if you live in the property yourself.
• You can’t include any expenses that your tenants pay. For example, you can’t claim water rates as a deduction if the tenant pays them.
• You can’t make income tax claims on the purchase cost or stamp duty. You also can’t deduct conveyancing costs or any other fees related to the purchase.

Instead, you’ll add these fees to the property’s cost base. This becomes relevant when you sell the property. Each sale incurs Capital Gains Tax (CGT). You can use these expenses to lower the CGT you pay.

You must understand deductions before buying an investment property. Australia’s taxation laws could trip you up. If you make incorrect deductions, you place yourself at risk of fines and legal action.

Source: Your investment property  magazine

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