Tax Deductions for Your Rental Property

Property Investors are targeted each year by the Australian Taxation Office (ATO) so it’s important that you know what you can – and cannot – claim as a tax deduction.

Basically, you can claim anything that is incurred on the investment property, but expenses however, are broken into 2 categories and claimed in 2 different ways:

1) Capital Costs

Capital costs are those associated with the purchase of the property.

These costs are not deductible against the rent (income) received, but added to the cost of the property so that when the property is sold it reduces your Capital Gains Tax.

The main ones are:

• Conveyancing costs
• Stamp Duty
• Legal Fees
• Search Fees
• Costs involved with Borrowing money from the bank (which can be claimed over the period of the loan or 5 years whichever is shorter).
• Mortgage Insurance

Make sure you keep a record of these expenses so that if and when you decide to sell your property, your property accountant will be able to claim these

2) ‘Running Costs’

Running costs are those that are incurred to maintain the property.

These can be claimed against the rental received.

Running costs are essentially anything spent on maintaining the property,  examples such as:

• Legal expenses associated with the lease 
  
• Council fees, water rates,
• Body corporate fees
• Electricity is normally paid by the tenant.
• Insurance
• Advertising
• Real estate agents fees
• Bank charges
• Depreciation on the property buildings (constructed after 1985)
• Depreciation on fixtures and fittings.
• Repair costs

Repairs costs are tricky area because it falls into 2 categories:

Maintenance or repairs means to restore to its original condition (e.g. repair a dilapidated wooden paling fence, apply a new coat of paint etc.). Costs related to property maintenance and repairs to fixtures and fittings can be claimed as a tax deductible expense.

However if you were to improve or change the original condition, then it’s a Capital expenditure and you can only depreciate it.

An example is to replace a wooden paling fence with a brick wall – the brick wall may be claimed as depreciation over the life of the asset.

• Lawn mowing and gardening
• Travel expenses

This is another tricky one as it must not be incidental to the trip.

Example: if you were going to Brisbane for a holiday for 3 weeks and you happen to drop in to inspect your rental property then that is incidental and not deductible. 

Rather, the holiday itself must be incidental and the main purpose for your trip must be to inspect your property in order for the trip to be deductible.

• The Interest on loan is deductible but not the principle amount.

In summary, smart property investors claim all the tax deductions and depreciation costs that they’re legally entitled to.

Working with a property tax specialist accountant and quantity surveyor can help investors maximise their property tax deductions in relation to tax deductible expenses and depreciation deductions.

Please refer to your accountant for your individual circumstances as these comments may not be applicable to you in your circumstances.

Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.