One of the benefits of owning an investment property over your own home is the tax deductions that are available for investment properties. We look at the major tax deductions landlords need to know to pay less tax this financial year.
Borrowing expenses
Unlike home loan interest on an owner-occupier property, interest and other loan expenses (such as bank fees) on an investment property loan can be claimed in full as a tax deduction in the year they are incurred. Depending on the size of your loan, this deduction alone can result in a significant reduction to your tax bill.
Property management expenses
Property management costs associated with an investment property can include expenses such as:
- advertising for tenants
- council rates
- insurance (building, contents and public liability)
- property manager fees (i.e. services that manage tenants on your behalf)
- accounting/tax agent fees
- land tax
- body corporate fees and charges (for units/apartments).
These can also be fully deducted in the financial year they are paid.
Repairs and maintenance expenses
Investment property expenses are considered repairs if they involve a replacement or renewal of a broken or worn out part while (or after) the property is rented to tenants. For example, replacing:
- guttering that has been damaged by a falling tree branch during a storm
- broken light fittings
- broken tiles
- broken windows
- electrical appliances or machinery
- tap washers and fittings.
Maintenance is preventing or fixing deterioration. For example:
- painting
- oiling a deck
- cleaning
- gardening and lawn mowing
- pest control.
It’s important to understand the difference between repairs and maintenance costs and renovations/improvements because renovations/improvements are treated differently for tax deduction purposes.
Renovations/improvements have the following characteristics:
- they provide something new
- they generally improve the income-producing ability or expected price of the property
- they generally change the character of the investment property
- they go beyond restoring the efficient functioning of the property.
Examples of renovations/improvements include:
- a new kitchen, bathroom or extension
- adding or removing an internal wall
- adding a carport, gazebo, sealed driveway, fence or retaining wall.
Unlike repairs and maintenance costs, renovation/improvement expenses cannot be claimed as full tax deductions in the financial year that they occur. Instead, 2.5% of these costs can be claimed each year for 40 years from the date the construction is completed, provided the property remains available for rent.
Depreciation
You can claim tax deductions for depreciating assets that you buy for your investment property. A depreciating asset is defined by the Australian Taxation Office (ATO) as being one that has limited life expectancy and can reasonably be expected to decline in value over the time it is used. They are standalone, functional units that are generally not fixed to the property.
The ATO provides a comprehensive table of the estimated useful life of a wide range of potential investment property assets. Alternatively, you could engage the services of a quantity surveyor to assess your property’s assets and provide you with a depreciation schedule. You can also estimate the useful life of your assets yourself and depreciate them accordingly, provided you can justify your calculations.
Examples of investment property assets that you could depreciate include:
- furniture
- air conditioners, heaters and solar hot water systems
- solar panels (however any rebate you receive for installing these panels would need to be included in your assessable income)
- kitchen and laundry appliances (e.g. stoves and whitegoods)
- carpets
- curtains.
The full depreciation on an asset costing $300 or less can be depreciated in its first year of use. However, the depreciation on assets with a value over $300 must be spread over the asset’s estimated useful life.
How our Purple Cow property management team can help you
If you have an investment property in the Greater Springfield area, we would love to manage it for you. The latest real estate.com.au figures show that we are currently generating market rents that are an average of 11% higher for our landlord clients than competing agents, as well as 26% more tenant enquiries for our rental property listings.
Or if you are keen to buy a Greater Springfield investment property, then our Purple Cow investment team can help you to find the right property and tenants to maximise your return.
Contact us today to find out how we can help you.
