The cost of property investment stretches beyond the purchase price. Investors typically allocate thousands of dollars annually towards all necessary expenses while waiting for capital growth to materialise. These include property management, maintenance, council and water rates, insurance and loan interest.
Rental income offsets much of your monetary outlay, but maximising available tax deductions becomes crucial, particularly when holding expenses exceed your income stream.
Jaime Pratt, Head of PM at VPM, explains that Australia’s tax system provides generous tax concessions for investors, which will help you save significant money.
“Many expenses associated with running your investment property are tax deductible either in the income year incurred or over several years,” she says. “Most investors aren’t aware of the many small deductions available, which can add up to a lot of money.”
Hiring a qualified accountant to do your tax return is the best way to ensure nothing is missed; however, if you want to do it yourself, you must know what you’re doing.
Jaime advises that there are three types of property investment expenses.
1. Those you can claim as an immediate deduction in the income year incurred
2. Those you can claim as a deduction over several years
3. Those that are not deductible at all
“To maximise your deductions, the most important thing to do is keep good records,” Jaime says. ”You don’t have to be super organised. Throughout the year, just throw every receipt related to the operation and upkeep of your investment property into a box and hand it to your accountant after June 30.”
If you misplace any receipts but paid with a credit card or EFTPOS, the tax office will accept bank statements for individual taxpayers as proof of purchase. Ensure you scour them at the end of the financial year for expenses you don’t have separate receipts.
Jaime constantly highlights to investors the need for professional advice at tax time to ensure mistakes aren’t made or opportunities missed. “There have been changes to allowable deductions in recent years. Many investors don’t realise they can no longer claim travel expenses when visiting their investment property interstate or elsewhere when they need to inspect it or attend to a repair,” she warns. “Your accountant or the tax office can provide the most up-to-date advice.”
Don’t be afraid to contact the ATO either. They appreciate people checking the rules, so feel free to ring them and ask questions if there is something you don’t understand.
Here’s our quick checklist of expenses immediately deductible for the year incurred:
• Advertising for tenants
• Bank charges
• Standard Body Corporate fees
• Cleaning costs
• Council and water rates
• Depreciation
• Gardening and lawn mowing
• Insurances – building, contents, public liability
• Interest on loans
• Lease document expenses – preparation, registration, stamp duty
• Some legal expenses
• Pest control
• Property agent fees and commissions
• Quantity surveyor’s fees
• Some repairs and maintenance costs
• Bookkeeping fees
• Servicing costs – eg: service to a water heater
• Stationery and postage
• Telephone calls
• Some tax-related expenses
On the other hand, there are some costs you might think are deductible but aren’t. Here are a few standouts:
• Quarterly body corporate administration and sinking fund fees are tax deductible, but special levies for a particular capital expenditure are not (in this case, you can usually claim a capital works deduction instead).
• Some legal expenses are deductible, like the cost of evicting a non-paying tenant. However, most legal fees, such as conveyancing costs, are of a capital nature and are, therefore, not deductible. Instead, these costs usually form part of the cost base of your property, which might reduce your capital gains tax when you sell.
• You can’t claim the cost of a buyer agent’s fee. This cost will also usually form part of the cost base of your property, which might reduce your capital gains tax when you sell.
• Only the interest paid on the loan for your investment property is deductible. You can't claim the principal portion if you are paying principal and interest.
“Many investors don’t understand depreciation, but it’s arguably the most valuable of all deductions in monetary terms, especially if your investment property is a relatively new build,” Jaime explains.
“Before leasing your property, we highly recommend engaging with a quantity surveyor to inspect it and provide a report. This will detail how much depreciation on the building and your property’s fixed contents you can claim yearly.”
It can amount to thousands of dollars per annum, so it is crucial not to skip this step. All the information above is general in nature, and we suggest it is used as a guide only. With most tax matters, it’s best to get professional advice. For more information, download the ATO’s Rental Properties Guide or contact our Property Management team, who can head you in the right direction before June 30th.
