Tax Deduction Tips For Investment Properties

Buying an investment property that you rent out to tenants can help you to reduce your tax if you maximise all the tax deductions you’re entitled to claim. There are many expenses associated with an investment property that is tax deductible. These expenses reduce your overall taxable income (which includes the rental income generated from your tenants) and therefore the tax you’re required to pay. The higher your marginal tax rate, the more tax you’ll save, which can really help with your cash flow. Below are common investment property expenses that you can claim as tax deductions.  

Borrowing expenses

The major borrowing cost for an investment property is usually interest on a loan (or loans) to:

• buy the property
• finance renovations/improvements or major repairs.

  Investment property loans for well-chosen properties in good locations are an example of good debt. In other words, it is debt that can help you to build your wealth over time. Interest on an investment property loan can be claimed as a full tax deduction in the year it is charged. You can also prepay interest on your investment property loan up to 12 months in advance to claim an additional tax deduction in a particular financial year. There can also be associated borrowing expenses besides interest, such as:

• loan establishment fees
• any ongoing loan fees
• the lender’s title search fees
• the lender’s valuation fees
• mortgage discharge expenses
• mortgage broker fees
• the cost of preparing and filing mortgage documents (e.g. by a solicitor)
• mortgage registration fees
• lender’s mortgage insurance (LMI). Lender’s mortgage insurance may be required by your lender to protect them if you default on your repayments. The policies of different lenders vary, but many will require you to take out LMI if you have less than a 20% deposit for your property, or if you are relying on rental income to make your repayments. That’s because there is always the risk of tenant vacancy.

 

Property management costs

These can include expenses such as:

• advertising for tenants
• council rates
• property insurance (building, contents and public liability)
• property manager fees (i.e. services that manage tenants on your behalf)
• accounting/tax agent fees
• land tax
• body corporate fees and charges (for units/apartments).

 

Repairs and maintenance costs

Investment property expenses are considered repairs if they involve a replacement or renewal of a broken or worn out part of the property (including appliances). Maintenance is preventing or fixing property deterioration. For example:

• painting
• oiling a deck
• cleaning
• gardening and lawn mowing
• pest control.

If your investment property is a unit/apartment, repairs and maintenance costs usually come out of a common fund that you contribute to. You can claim the amount of your contributions to this fund as a tax deduction.  

Renovations and improvements

It’s important to understand the difference between repairs and maintenance costs and renovations/improvements because they are treated differently for tax purposes. Renovations/improvements typically provide something new for an investment property to improve its income-producing capability and/or its value. Examples of renovations/improvements include:

• a new kitchen, bathroom or extension
• adding or removing an internal wall
• adding a carport, gazebo, sealed driveway, fence or retaining wall.

Renovations/improvements are classed as capital works expenditure for an investment property. Unlike repairs and maintenance costs, renovation/improvement expenses cannot be claimed as full tax deductions in the financial year that they occur. Instead, 2.5% of these costs can be claimed each year for 40 years from the date the construction is completed, provided the property remains available for rent. It’s fairly common for property investors to mistakenly claim repairs and maintenance tax deductions when the work is actually a renovation/improvement. The Australian Taxation Office (ATO) conducts routine audits and reviews of these investment property claims accordingly.  

Depreciation

You can claim tax deductions for depreciating assets that you buy for your investment property. For example:

• furniture
• air conditioners, heaters and solar hot water systems
• solar panels (however any rebate you receive for installing these panels would need to be included in your assessable income)
• kitchen and laundry appliances (e.g. stoves and whitegoods)
• carpets

The full depreciation on an asset costing $300 or less can be depreciated in its first year of use. However, the depreciation on assets with a value over $300 must be spread over the asset’s “estimated useful life”. The ATO provides guidelines about how to depreciate the value of a range of different investment property assets on their website.  

Legal expenses

You can claim any legal expenses associated with an investment property such as:

• conveyancing costs when you buy it
• preparing tenant lease documents
• costs associated with evicting a non-paying tenant.

 

Other professional adviser fees

If you use the services of a financial planner, mortgage broker or tax agent to help you with handling the financial side of things with your investment property, those fees are also tax-deductible.  

The bottom line

Whether you do your own tax or use an accountant/tax agent, it’s important that you keep records of your investment property expense claims for at least five years.  

How we can help

At Fast Repay Home Loan, we can help you to implement strategies to pay off your investment property loan as soon as possible. We’ll take the time to understand your needs and goals so we can provide you with the best possible advice. Our fees are also tax-deductible! Call 1300 707 955 or email info@fastrepayhomeloan.com.au/backup to find out how we can help you, and to secure your free consultation with one of our expert advisers.