Property investors can maximise their tax savings with these top tips
Many property investors are familiar with common tax deductions like property management fees and repairs. However, several significant deductions often go unnoticed, potentially costing investors thousands annually. Here are the top four most impactful tax deductions every property investor should consider.
1. Interest on construction loans
A pivotal 2019 ATO ruling clarified that interest incurred on loans used for constructing rental properties is tax- deductible. This applies even if the property isn’t yet generating income, provided there’s a clear intention to rent upon completion. This distinction ensures that construction loan interest isn’t classified as a non- deductible holding cost.
If you’ve missed this in previous years, you may be able to amend your tax return (typically within a two- year window). Always check with your accountant or tax advisor before doing so.
For example, if you secure a loan to build a rental property, the interest accrued during construction can be claimed as a deduction, enhancing your cash flow during the build phase.
2. Lenders mortgage insurance
Lenders mortgage insurance (LMI) is typically required when borrowing more than 80% of a property’s value and can be a substantial expense. Fortunately, for investment properties, LMI is considered a borrowing cost and is tax- deductible. The deduction is spread over five years or the term of the loan, whichever is shorter.
For instance, a $10,000 LMI premium on an investment property can yield a $2,000 annual deduction over five years, providing significant tax relief.
3. Interest on investment loans
Interest paid on loans used to purchase, renovate or maintain investment properties is fully tax-deductible. However, it’s crucial to ensure that the borrowed funds are exclusively used for income-producing purposes. If the loan serves both personal and investment purposes, only the portion related to the investment is deductible. For example, if you refinance your home loan to extract equity for an investment property, only the interest on the portion used for the investment is deductible.
4. Depreciation
Depreciation allows investors to claim deductions for the wear and tear of a property’s structure and assets. There are two primary types. The first, capital works deductions relate to the building’s structure and permanent fixtures, typically claimed at 2.5% per year over 40 years. The second, plant and equipment deductions cover removable assets like appliances and carpets. Note that for properties purchased after 9 May, 2017, deductions on second-hand plant and equipment are limited. Engaging a qualified quantity surveyor to prepare a depreciation schedule can help maximise these deductions.
Additional deductible expenses
Beyond the top four, investors should also be aware of other deductible expenses. These include: property management fees, repairs and maintenance costs, council rates and land tax, and insurance premiums such as landlords or building insurance. Legal fees related to tenancy issues, and advertising costs for attracting tenants can also be deductable.
Optimise your investment returns
Understanding and leveraging these often-overlooked tax deductions can significantly boost your property’s performance – not just during tax season, but across your entire investment journey.
To ensure you’re maximising your returns:
- Maintain detailed records of all income and expenses.
- Work with a property-savvy accountant who understands investment strategy.
- Secure a depreciation schedule prepared by a qualified quantity surveyor.
- Seek professional guidance when dealing with construction finance, equity loans or complex portfolio structures.
Have you reviewed your investment property’s deductions recently? Even seasoned investors can miss claimable items. A simple review with your accountant or property wealth planner could uncover thousands in additional savings, year after year.
Take action with confidence
InSynergy specialises in helping investors make smarter property decisions – from strategic planning and finance structuring, to long-term portfolio growth. We work closely with your accountant and other advisors to ensure every aspect of your investment journey is considered – especially when it comes to maximising outcomes within the bounds of current tax legislation.
Whether you’re building, buying, or reviewing your strategy, the team can guide you with tailored property investment advice and practical tools to help you grow with confidence.
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
