Tax deductions made easy for property investors
Owning an investment property is a popular strategy to build wealth, and one of the significant benefits is the array of tax deductions available. As a property owner it can be daunting to keep on top of all your entitlements. Seeking professional advice from your property wealth planner, accountant, financial advisor and tax advisor can help you to understand and leverage these deductions to maximise your returns and optimise your investment. Here’s an in-depth look at the tax deductions you can claim as an investment property owner in Australia.
Interest on investment loan
One of the most substantial deductions available is the interest charged on the loan used to purchase the investment property. This includes any interest on loans taken for the purchase of the property; financing renovations or repairs; and other costs directly associated with maintaining the property as an income-producing asset.
Interest on construction loan
If you are constructing the investment property (a land and build contract), the interest on the construction loan is tax deductible. The Australian Tax Office (ATO) made a ruling in 2019 to bring this deduction into effect. If you’ve constructed a property or are constructing a property that is going to be leased out as an investment property, the interest paid on the construction loan is tax deductible. If you’ve not claimed this deduction, you can amend tax returns up to two years, however it is best to speak with your accountant or tax advisor before amending your tax returns.
Depreciation
Depreciation is a non-cash deduction that allows you to offset the decline in value of your property and its contents.
There are two main types of depreciation deductions. The first, capital works depreciation, relates to the building itself and any structural improvements. You can typically claim 2.5 per cent of the construction cost per year for 40 years.
The second is plant and equipment depreciation. This includes items such as carpets, appliances and furniture. The ATO provides detailed guidelines on the effective life of various items, allowing you to claim depreciation over several years.
Property management fees
If you use a property management company to manage your investment property, the fees charged by the manager are fully deductible. This includes ongoing management fees; leasing fees; and costs associated with advertising for tenants.
Repairs and maintenance
Expenses incurred for repairing and maintaining the property to keep it in a tenantable condition are deductible. These costs must be directly related to wear and tear or damage occurring as a result of renting out the property. Examples include fixing leaky taps; repainting walls and repairing appliances.
However, it’s important to distinguish between repairs and capital improvements. Repairs restore the property to its original condition, while capital improvements enhance the property’s value and must be depreciated over time.
Insurance premiums
Insurance is essential for protecting your investment property. You can deduct the cost of various insurance policies, including landlord insurance; building insurance; and contents insurance for items you provide in a furnished property.
Council rates and land tax
Council rates and land tax imposed by state or territory governments are deductible. These expenses are part of the ongoing costs of owning an investment property.
Utilities
If you cover the cost of water, gas, electricity or other utilities for your tenants, these expenses are deductible. It’s common in some rental agreements for the landlord to cover these costs, especially in furnished properties or short-term rentals.
Legal expenses
Legal fees associated with the investment property are deductible. These might include the cost of preparing lease agreements. They can also include legal fees incurred from recovering unpaid rent or evicting tenants.
Advertising for tenants
The cost of advertising to find new tenants, including online ads, signs and property listings, is deductible.
Seeking advice can help you maximise your returns and optimise your investment
Fees for expert advice
Professional services fees, like those paid for advice to build or manage your investment property portfolio, including those paid to your property wealth planner, accountant and tax advisor can be tax deductible.
Maximising your tax deductions is a crucial aspect of property investment strategy in Australia. By understanding and leveraging these deductions, you can significantly improve your investment returns. Always keep detailed records and seek professional advice from an accountant, tax professional or property wealth planner to ensure you’re fully compliant and taking advantage of all available deductions. Investing in property is not just about capital growth but also about smart tax planning to enhance your overall wealth.
Richard Sheppard is the CEO and founder of inSynergy Property Wealth Advisory. inSynergy provides a broad range of professional services designed to assist with all aspects of property investment. Phone 1300 425 595 or visit insynergy.net.au