Tax benefits for investment property owners
Posted by Northadvisory on September 24, 2020
Investing in property is a popular wealth management strategy for many Australians… and with good reason. Property offers some unique tax benefits that you don’t receive with other types of investments.
When you buy an investment property, understanding your tax obligation in relation to rental income is important, but it is equally important to be familiar with the wide range of tax advantages. Implementing a plan to make sure you access all applicable tax deductions should be one of the first actions you take after contracts are signed.
Here we look at some of the most common tax benefits for investment property owners.
Central to the strategy called ‘negative gearing’ is the ability to claim a personal tax deduction for the interest you pay on your investment property mortgage. This strategy involves making a short-term loss, where the rental income you receive is less than the combined costs of maintaining your investment. But this loss is offset by the personal tax benefits and the overall potential for capital growth.
As an example, if your annual interest payments are calculated at $18,000 and you pay $150 in mortgage fees, you can claim a deduction of $18,150 when you process your personal tax return. However, it must be noted that you can’t claim any repayments you make that reduce the principal sum; it is only applicable to the interest portion of your payments.
Strata fees, council rates, water rates and more
If your investment property is leased, then there are many different expenses that can be tax deductible. Over the course of a year these costs can add up to a significant figure, so it is recommended that you seek professional accounting services to keep your books balanced. In fact… if you do utilise an accountant, even their fees are deductible.
Other examples of deductions include:
- Strata/body corporate fees
- Council rates for the period the property was leased during the year
- Water rates
- Land taxes
- Pest control costs
- Cleaning and gardening costs.
Rental management costs
If you have an investment property, it’s most likely that you have engaged the services of a real estate agent. The fees involved in rental listing and any associated property management rates are also considered tax deductible charges.
This includes all costs from online advertising, print media, brochures and any on-property ‘for lease’ signage. Every time your agent has to re-lease your property, these amounts are all deductible expenses… even if it’s more than once a year.
Building depreciation is another claim you might be able to make. However, this is slightly more complex as it depends on the year that your property was built. Older properties have lower applicable depreciation rates when compared to newer buildings and understandably, a brand-new property attracts the highest rate. Again, we recommend seeking professional advice with regard to these claim calculations as you might require the services of a quantity surveyor to determine your depreciation schedule.
In addition to building depreciation, you can also consider any permanent fixtures within the property. This includes lights, carpets, blinds, screens, air conditioning units, ovens and dishwashers. These items are particularly important if your property is new, as these types of fittings and appliances tend to lose their value more quickly than the building itself.
Maintenance repairs and renovations
It’s inevitable that your investment property is going to need some work. And in most cases these costs are tax deductible. If your tenants move out and the property needs a new coat of paint, that can be a deduction. If the pipes under the sink spring a leak and a plumber is called for the repair, that is a deduction.
However, if you undertake larger, more substantial renovations… for example, building a garage or removing an internal wall, this is likely to be classified as capital works and would attract a different tax treatment.
Any insurance you hold that relates to your investment property could also be tax deductible. This includes:
- Building, contents and public liability
- Landlord insurance that covers damage made by your tenants
- Lenders mortgage insurance.
If you are unsure, seek advice
While there’s no doubt that owning an investment property takes commitment and some hard work, the tax benefits present great opportunities to reduce your tax obligations. If you are unsure about whether this wealth building strategy suits your personal financial situation, it’s best to seek professional advice.