Tax tips for property investors: how to get more money back
Are you missing out on certain claims and deductions when it comes to tax time? Here’s how property investors can make the most of their tax returns.
What can you claim?
There are a lot of tax-deductible items that property investors may not be aware of. Although a tax deduction on the more financially demanding items is a lot more attractive, the little things do add up. The following is a list of tax-deductible expenses related to owning an investment property:
- Advertising costs and management fees
- Lease costs
- Building and landlord insurance
- Accounting and bookkeeping fees
- Tax-related expenses
- Council rates
- Legal expenses – in case of mediation or tenant/landlord dispute
- Depreciating assets
- Loan interest and ongoing fees
- Travel expenses – to inspect the property etc.
- Strata/body corporate fees
- Electricity, gas and water
- Repairs and maintenance
- Quantity surveyors’ fees – a quantity surveyor is a professional who is qualified to produce depreciation schedules, which you can use to claim tax benefits from property depreciation
- Stationery and postage expenses relating to managing your property
- Garden maintenance
However, these are not necessarily applicable to all investment properties or investors, and may not always be paid in full.
There are a number of misconceptions about claimable expenses such as initial repairs. Repairs made to the property immediately after purchase are typically not tax-deductible, as they are viewed as capital in nature.
It is also commonly believed that there is a cap on the number of travel expenses deductible per tax year. This is not the case, as long as the property owner retains proof that the trip was purely for business purposes.
It is essential that all receipts are retained at least until your tax return has been finalised, as it is not uncommon for the ATO to contact property investors for proof of expenses. It is suggested that receipts and other proof of purchase are kept for a minimum of five years.
What is depreciation and how does it work?
A property will inevitably depreciate in value from wear and tear over time, and much like with a car used for business purposes, the depreciation of an investment property can be claimed as a tax deduction – as an investment property is purchased for income-producing purposes.
Property investors can claim depreciation on a property for a maximum of 40 years from the date of construction completion, which means investing in newer properties will give you greater depreciation benefits.
There are two main categories investors can claim for rental property depreciation – plant and equipment deductions and capital works/building deductions.
Capital works deductions involve anything to do with structural elements of the property, such as:
- Structural walls
- Wiring
- Brickwork
- Windows
- Plumbing
Although deductions on capital work apply for 40 years from the date of construction of the property, renovations to the structural elements of the building can be claimed from the time of renovation.
Plant and equipment deductions involve anything that is easily replaceable within the property, including:
- Tap fixtures
- Carpets
- Blinds
- Water systems
- Appliances
These parts of the building will depreciate from the time of instalment for the duration of each item’s individual effective life, with no reflection on the age of the property. The ATO has standard measures that determine the age of individual items. Once an item has reached the end of what is deemed to be its effective life, you can no longer claim depreciation of its value.
In order to make a claim for the depreciation of a property, investors must obtain a depreciation schedule, which lists deductions available on a specific property. Depreciation rates are determined by the original cost of construction of a property. Quantity surveyors can estimate construction costs for depreciation purposes when there are no records of these for a particular property, and produce depreciation schedules.
Investors frequently miss many items eligible for tax depreciation, particularly the following:
|
Top assets on which tax depreciation is rarely claimed |
|
|
Asset |
Depreciable Value |
|
Exhaust fans |
$125.00 |
|
Bathroom accessories – freestanding |
$110.00 |
|
Shower curtains |
$30.00 |
|
Door closers |
$185.00 |
|
Smoke alarms |
$145.00 |
|
Garden sheds – freestanding |
$855.00 |
|
Ceiling fans |
$265.00 |
|
Clocks electric |
$20.00 |
|
Garbage bins |
$250.00 |
|
Light fittings non-hardwired |
$80.00 |
|
Mirrors – freestanding |
$185.00 |
|
Radios |
$55.00 |
|
Rugs |
$245.00 |
|
Solar powered generating system assets |
$5,500.00 |
|
Window shutters automatic |
$800.00 |
|
Spa bath pumps |
$425.00 |
|
Tennis court nets |
$550.00 |
|
Garbage disposal units |
$455.00 |
|
Water filters, electrical |
$195.00 |
|
Garden lights, solar |
$20.00 |
|
Tennis court maintenance equipment |
$900.00 |
|
Closed circuit television system |
$1,550.00 |
|
Water feature pumps |
$225.00 |
|
Garden watering systems |
$558.00 |
|
Intercom system |
$745.00 |
Source: BMT Tax Depreciation
Understanding negative and positive gearing
In terms of property investment, gearing is where funds are borrowed in order to invest. It is important to understand how your property is geared to ensure you maximise your tax benefits.
Negative gearing
Negative gearing occurs when the total rental income of a property is less than the total costs involved with owning the property, including mortgage repayments, strata fees, maintenance costs, etc. A negatively geared property will put investors out of pocket initially, but is expected to grow in value over time – thus offsetting the initial losses.
Negatively geared properties allow investors to claim tax deductions from the expenses incurred from owning and maintaining the property. Investors may also be entitled to reductions on taxable income if they own a property that is negatively geared. A loss on an investment property is determined by subtracting the total amount of monetary loss from your annual taxable income, meaning you will be taxed at a lower overall rate.
Positive gearing
Positive gearing occurs when the total rental income of a property is more than the total costs involved with owning the property. A positively geared property gives you a secondary income, which is desirable – however, it is taxed accordingly.
Where to seek advice