Tax deductions for investment properties

Owning an investment property can be a little like running a business. It can provide a great source of income and help to build personal wealth but inevitably comes with a series of costs that can hit your bottom line.

The excellent news for property investors is that many of these expenses are tax-deductible.

Tax advantages are not just available on new properties, while an older building may have limits on what you can claim, you do not have to buy a new house or apartment to qualify for tax benefits.

There are two components of a tax claim for a rental property. These are:

• Capital Works Allowance covers the structure, such as walls and roof tiles; and
• Plant & Equipment covers the so-called removable assets such as carpets, stoves, and hot water system etc.

You should always obtain professional accounting and tax advice to understand exactly what can and cannot be claimed according to your own specific circumstances as the Australian Tax Office changes the rules regularly. For example, only investors of new property can make claims under plant and equipment assets. However, exclusions exist for those properties that have been renovated. Talk to a professional to make sure you get the right advice. 

Those who own older properties can continue to depreciate items that fall under the capital works component, so long as it was built after September 15, 1987. And you may benefit from depreciation even if a previous owner undertook improvements.

So, working out what you can claim legitimately requires the eagle eye of a professional. 

In general, you will find the following items are tax-deductible:

• Costs associated with a property manager, which are usually 3-8% of rental income
• Accounting and professional financial advice
• Advertising if required to find new tenants, plus associated re-letting costs
• Strata levies
• Rates and land tax
• Insurances
• Loan interest and ongoing loan fees

Also, work with your accountant or financial adviser to build a tax depreciation schedule for your property. This document will list all the items in your property that qualify for depreciation. 

It should only need to be completed once, and it can then be submitted to the ATO each year to ensure you obtain the maximum possible tax benefits from your rental property.

There are also several small but important misconceptions about property investment that can catch out new or would-be landlords.

The Federal Government provides attractive financial incentives for property investment, and you don't want to miss out on those benefits. But it can be easy to get it wrong and find yourself with a nasty letter from the Australian Tax Office, especially on the issue of interest expenses. 

Again, that's why it's highly advisable to obtain professional financial advice and use a professional property management team to take away the day-to-day hassle and worry of being a property investor and provide you with the regular reports to make the end of financial year a breeze. 

Below are a few common misunderstandings below about interest expenses. 

According to the ATO, while interest and loan expenses may be claimable, there are strict rules around this. You can't claim a deduction for interest expenses:

• For any period that you used the property for private purposes, even if it's a short period. Be sure to nominate any period with your adviser or tax consultant to comply with legislation.
• You can't claim any portion of the original loan that you break off to pay or service another debt, buy a new car, a new washing machine, or be placed straight into your superannuation account. That remains true even if you're ahead in your repayments
• You cannot claim on a separate property loan for which you've used your rental as security unless that second property produces income.

Keeping great records is the key to submitting an accurate return. Talk to our professional property management team for advice on how best to set up recording for your investment property. 

In all circumstances, it's advisable to seek professional financial advice before buying an investment property or expanding your portfolio. This article here is for general purposes only and is not professional advice it does not take into account the specific needs, objectives or circumstances of the reader. Before acting on any information, you should consider whether it is appropriate for your personal circumstances, carry out your own research and seek professional advice.