Property investors have access to many great, money-saving tax deductions. Unfortunately, confusion and overwhelm lead to many eligible deductions being left unclaimed, while investors wonder why their rental properties aren’t turning the profit they predicted.
Knowing which deductions you can claim each financial year is the key to maximising the profitability of your investment property. Have you been missing out on any of these 7 commonly missed tax deductions?
Depreciation is something that will boost your bottom line when tax time comes around. Just as you can claim wear and tear on a car purchased for income-producing purposes, you can also claim the depreciation of your investment property against your taxable income. The age of the building will affect the deduction costs, and the most experienced property investors will actually take depreciation into account when considering their next property purchase.
And yet, thousands of dollars go unclaimed every year. The ATO allows all owners of income-producing properties to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time.
2. Other depreciating assets
In addition to the decline in value of the building’s structure, Australian tax law allows some investors to claim deductions on the items considered permanently fixed to the property, and the plant and equipment assets found within it. Ovens, dishwashers, carpets, light fittings and blinds are all examples of depreciating assets. However, it’s important to understand that everything depreciates at different rates, which is why figuring out your entitlements can get so confusing. Restrictions also apply for second hand investment properties purchased after 9th May 2017
The best way to ensure you maximise your depreciation claim is to work with a investment property tax specialist who can devise your tax depreciation schedule.
3. Advertising for new tenants
To qualify for any of these deductions, your property must be rented or be available for rent. This means you must either have current tenants or be actively advertising your property to renters to be eligible to claim the any of the deductions associated with investment properties.
Whether you advertise on domain.com.au, realestate.com.au or in newspapers, brochures or on signs, there are usually some costs involved. As long as you’re advertising your property to be rented, you will be able to claim the advertising costs as a deduction against your rental income in the same year that you paid for them.
4. Borrowing expenses
When you first purchase your investment property the borrowing expenses involved can be claimed as a tax deduction.
The ATO recognises borrowing expenses as the costs directly incurred through taking out a loan for your investment property. These expenses include:
- Loan establishment fees
- Title search fees
- Costs of 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
The ATO website also states that if your total borrowing expenses are more than $100, the deduction is spread over five years. However, if the total borrowing expenses are $100 or less, you can claim a full deduction in the income year they are incurred.
5. Loan interest
A common misunderstanding among property investors is that payments made on the principal sum of the loan are tax deductible. If you required a home loan to purchase your investment property and are paying back the principal along with interest, only the interest portion of your payments are tax deductible.
Interest on loans that are secured for private purposes, like a holiday, can’t be claimed as a tax deduction because the loan wasn’t taken out for an income-generating purpose. This also means that if you refinance part of your home loan for private purposes, you will be unable to claim interest on the entire sum of the loan.
However, property investors often forget that they can claim the interest repayments on loans used to purchase a depreciating asset for their rental property, to make repairs, or to finance renovations. In most cases, interest is tax deductible as long as the loan is for your investment property and not for private use. Monthly and annual bank fees are also deductible.
6. Property management fees
Managing an investment property can be a lot of work, especially if you don’t intend to be operating a rental property business. In most cases, it makes sense to hire a real estate agency to manage your investment property for you. Property managers will usually charge a fee of around 6-8% of the rental income (negotiable), which can be claimed as a deduction on your annual tax return.
As a bare minimum, a property manager will collect rent, find new tenants and maintain your rental property through regular inspections. That said, the best property managers will also help take the stress and emotion turmoil out of your investment, while helping you generate wealth. Given their fees are tax deductible, the perfect property manager is definitely worth looking out for. Once you find them, hang on to them tightly!
7. Accounting fees
Most property investors hire an investment property tax specialist for expert advice, preparation of tax returns and rental account management. But did you know that your bookkeeping costs are also immediately deductible? You can claim the costs of any accounting fees incurred for the management of your rental accounts in the same year those costs were incurred.
Since accountant fees are yet another investment property tax deduction, it certainly makes sense to leave the task of claiming all your other deductions in the hands of an expert!
Every property is different, just as every property investor has different goals. This is why ABA Tax offer a free consultation and analysis of your individual needs. Want more from your accountant? Say hello to your investment property tax specialist from ABA Tax today.