Which fees and charges are tax deductible?

Every year at tax time I wonder whether property investors are the only people in Australia who look forward to submitting their tax return! 

That’s because property investment not only provides us with the ability to create long-term wealth through the purchase of income-producing assets, but our tax system allows us to claim legitimate expenses along the way.

I’ve often said that the tax man wants us to be property investors

But it’s important to understand which fees and charges are tax deductible and which ones will just get the tax office offside, which is obviously not something that you ever want to do.

When investors purchase a property there are a number of expenses that must be paid at the outset. 

These include things like bank fees, body corporate fees, solicitors and conveyancing costs, stamp duty and possibly lenders mortgage insurance. 

Many of these initial costs are not tax deductible as the are considered capital costs of purchasing your property, but moving forward, with a little tax knowledge and some professional advice, you may be able to claim many of the ongoing expenses associated in the process of generating income from your investment property as tax deductions.

Preparing tax returns and claiming deductions where investment properties are concerned can be complex, so it’s important to seek advice from a property savvy accountant to do this for you.

While there are a range of expenses related to investing in property, the criteria for deducting these expenses varies.

According to the Australian Taxation Office’s (ATO) guidelines, the basic principles of the three main types of rental expenses are:

1. Those that cannot be claimed;
2. Those that can be claimed as an immediate deduction in the year that they are incurred;
3. Those that can be deducted over a number of income years.

Deductions can generally be claimed for expenses that are incurred for the period that the investment property has been rented out or has been available for rent.

So, what can be claimed and what can’t?

Not all fees and costs that are associated with an investment property are able to be claimed as a tax deduction.  

Generally speaking, you are not able to claim a tax deduction for any expenses that are related to acquisition costs of the property; costs that are not incurred by you such as electricity charges paid by your tenants; or costs not related to the rental or income generation from the property.

Conveyancing costs, stamp duty on the property transfer and advertising the property for sale – which are all related to the acquisition or disposal of the property – are generally not able to be claimed as deductions.

However, in relation to Capital Gains Tax, you are able to add these costs to the property’s cost base or reduced cost base.

What can be claimed as a tax deduction?

Yet there is a long list of expenses related to the purchase and maintenance of an investment property that are able to be claimed as an immediate tax deduction and can be claimed in the income year that they were incurred.

Some of these expenses include:

• The cost of advertising for tenants for your property;
• Bank charges and interest on loans;
• Body corporate fees and charges;
• Council rates, electricity, gas and water charges (unless these are borne by the tenants);
• Building, contents and public liability insurance; 
• Some legal expenses and lease document expenses;
• Depreciation – but the rules for this have recently changed and will effect purchasers of established properties after 9th May 2017 .
• Pest control;
• Repairs;
• Maintenance and service costs;
• Gardening and lawn mowing costs;
• Any fees and commissions paid to property agents and quantity surveyors;
• Any travel and car expenses

The interest charges incurred on loans that you’ve taken out to purchase the property, or to pay for any necessary repairs or renovations, can be claimed a deduction – as long as the property is being rented out or is available for rent. 

Some legal costs that are incurred in course of renting an investment property can also be claimed as tax deductions.

There are certainly myriad legitimate tax deductions that investors can claim every year, which require a bit of extra record-keeping along the way.

Keeping track of any deductible expenses incurred during the ownership of your investment properties will make tax time smooth and not a headache to avoid, so you can continue along your investment journey on the right side of the ATO.