There are a multitude of items that property investors can claim in tax. The ATO lists the following items as tax-deductible:
So with such a long list of items, ideally you should be claiming all relevant items; however, there are certainly some big items that you should be concentrating on.
Negative gearing is one of the more popular tax deductions that property investors can claim. Negative gearing is when the total rental income from the property does not cover the total costs involved with owning the property such as mortgage repayments, maintenance costs and strata fees. This means that property investors will have to make up the loss from their own pocket initially; however, over time the property should grow in value which will offset the loss. Sometimes this loss can be pretty affordable, with an out of pocket expense of perhaps $10 a week.
Depreciation is also another big tax deduction that property investors should claim, especially if you have purchased a brand new property or one off the plan as the greatest claims occur in year one. You can claim on the actual building itself for a total of 40 years from the date of construction completion, whilst you can also claim on internal fixtures and fittings such as blinds, carpets and microwaves. Depending on the cost, some of these items can be written off in full, if they cost $300 or less. To ensure you are claiming all possible depreciation costs, it’s best to get a quantity surveyor to produce a depreciation schedule for you. Plus, you can claim back on the quantity surveyor’s fees too.
To get the most out of your tax return you should also plan when you buy new appliances such as a new oven. If you buy these in June then you only claim one month of depreciation. It’s therefore best to buy these items, especially any big items you know that need replacing during the early part of the financial year.
Managing a property yourself can be particularly time consuming and stressful, especially if you have more than one property to manage in various suburbs or interstate. It can therefore be easier to use a property manager to do all the hard work for you and their fees are tax deductible as are the advertising costs for new rental tenants.
If you are managing the property yourself then don’t forget you can claim to see your property as many times as you like, as long as the trip is to genuinely to inspect the property, collect rent or carry out any repairs or maintenance.
Initial repairs is one expense claim that is often misunderstood. Any repairs made to the property straight after the property purchase are not tax-deductible. This is because they are categorised as capital works. You should therefore claim this under depreciation as a capital works deduction over 40 years instead.
If you end up replacing something in its entirety, rather than replacing the damaged or broken part then this cannot be claimed as an immediate tax deduction on your investment property. For example, if one of your kitchen cupboard doors is broken and you decide to replace all of the kitchen cupboards then this is not deductible as a repair.
Anyone that knows they will be on a lower income next year such as redundancy or maternity leave should consider pre-paying next year’s interest and claim the deduction this year instead.
One great tip for property investors who have a negatively geared property and need to make up the difference from their pocket is to complete a PAYG Withholding Variation Application. Instead of receiving a lump sum back at tax time, you will have less tax taken out of each pay. This is good for those, who find themselves a bit short of cash each month.
Ideally you should be holding onto your property for the long term; however, if you need to sell then it’s best to try to do this after owning the investment property for 12 months or longer as you will reduce your capital gains tax (CGT) by half. Also, by exchanging contracts after 1 July, you will also defer your tax for another year.
If this investment property used to be your principle place of residence, then this property can be treated as your main residence for up to six years after you stopped living there, providing you don’t have any other main residence. This means that you are exempt from CGT.
Having an interest-only loan on your investment property can help with tax due to the interest always remaining high due to the principal never being reduced. This can help offset your overall taxable income; however, you should speak to a Mortgage Broker to work out what loan type is best for your circumstances.
If your investment property lies vacant for a period of time or is not available for rent, then you cannot claim a deduction for interest or any other expenses during this time.
Make sure you keep all receipts and get into good habits of filing these away neatly. The ATO audits thousands of taxpayers every year to ensure their claims are genuine. If you have no receipt, then there is no deduction, so it’s best that you have proof for everything so you can justify your claim. You should also keep receipts for a minimum of five years.
Having a good accountant is also a great move as they know exactly what you can and cannot claim, plus their fees are also tax deductible. If you own more than one investment property, sorting out tax can get quite confusing so this will certainly make your life much easier and less stressful.
To find out more about how much tax you could be saving by owning an investment property, why not book a meeting with one of our expert Property Consultants at iBuyNew. Call us today on 1300 123 463 and find out how you can build a stronger property portfolio.