Are you running the numbers trying to work out if an an investment property is within your financial reach? Many people fail to take into account the benefits of investment property tax deductions, which could be the crucial difference in turning your dream of property investment it into an achievable reality.

In addition to benefits of property investment such as rental income and captial growth, did you know you also have a wide array of tax deductions available to you as a property investor? From council rates and loan interest to maintenance and repair expenses, many deductions incurred as a result of owning an investment property can go towards reducing your taxable income.

Schedule a complimentary consultation today to learn how you can maximise your returns and give you a clearer picture of your investment opportunities.

Essential tax deductions every property investor should know

Owning a rental property provides opportunities to lower your taxable income through eligible tax deductions. According to the Australian Tax Office (ATO) guidelines, property investors can claim immediate and long-term deductions to offset their rental income and manage investment property expenses effectively.

Here’s a breakdown of deductions you can take advantage of:

Immediate tax deductions

As a property investor, you can claim various tax deductions to offset your rental income and reduce your taxable income.

Here’s a detailed list of immediate deductions you can take advantage of for your investment property:

Advertising for tenants

Expenses for advertising your rental property to generate income are tax-deductible.

Body corporate fees (Strata)

If your rental property is part of a complex, you can claim these as investment property expenses.

Cleaning and gardening

Regular cleaning services and general wear maintenance, including gardening, are deductible.

Pest control and security patrols

Expenses for pest control and any security measures for protecting the rental property can be claimed.

Council rates and water charges

These ongoing rental property expenses, including council and water rates, are tax-deductible.

Property management fees

Costs paid to a real estate agent or property management service for managing your rental property are tax-deductible.

Administrative costs

Stationery, communication, and other administrative expenses related to managing your investment property can be claimed.

Insurance costs

Claim deductions for landlord insurance, building insurance, contents insurance, and public liability insurance.

Long-term deductions

Certain costs, like capital works expenses for structural improvements and major repairs, can be depreciated over time. A tax depreciation schedule, typically prepared by a quantity surveyor, can help you maximise these deductions.

Capital expenses and borrowing costs

Expenses related to the property’s purchase, such as conveyancing fees, lenders mortgage insurance, and stamp duty, may also offer tax benefits, either as immediate deductions or over the loan term.

Interest on Loans

Interest charged on loans used to purchase or maintain investment properties is one of the most valuable investment property tax deduction. Remember that only the interest portion of loan repayments is tax-deductible, not the principal amount. This interest claim can significantly reduce your taxable income and is a key part of managing your investment property tax effectively.

Additionally, fees paid to a quantity surveyor for preparing a tax depreciation schedule are tax-deductible. These schedules help maximise deductions for depreciating assets and capital works, benefiting property investors over the long term. Expenses related to attending property investment seminars, which provide insights into rental property management and generating income, can also be claimed as a deduction.

For brand new properties, a quantity surveyors report allows a deduction for depreciation and building allowance, however, for second-hand properties, only the building allowance is an allowable deduction, investors cannot claim the depreciation expense unless the new owner spends the money on new assets. For example, an air conditioning unit needs to be replaced, that cost can go onto the depreciation schedule at allowable rates and claim a deduction.

What you can’t claim on your rental property

When managing multiple investment properties, understanding which rental expenses you can and cannot claim is essential. While it’s important to claim rental expenses correctly to maximise your tax benefits, the Australian Taxation Office (ATO) also outlines specific limitations that property investors need to consider to avoid compliance issues.

Here’s a detailed look at expenses you cannot claim:

Rental property expenses that aren’t tax deductible

Certain costs associated with property investment are excluded from tax deductions:

Tenant-paid charges

Rental expenses paid by tenants, such as water or electricity, are not tax-deductible.

Acquisition and disposal costs

Expenses like conveyancing fees, advertising costs, and property purchase charges are added to the cost base and impact Capital Gains Tax calculations.

GST credits

Since GST doesn’t apply to residential rental income, you must include the total amount paid, including GST, when claiming any rental property expenses.

What to know about second-hand depreciating assets and deductions

Second-hand depreciating assets have specific restrictions for tax deductions, especially in residential rental properties.

Understanding these limitations is crucial for accurate tax reporting:

Existing residential property

If you purchased an existing residential rental property on or after 7:30 pm (AEST) on 9 May 2017, you cannot claim deductions for the decline in value of assets already present in the property.

Converted private residences

Converting your Primary Place of Residence into a rental property on or after 1 July 2017 means you can only claim depreciation on new assets bought for the property. To learn more about Primary Place of Residence read our article here.

Expenses for buying and selling an investment property

When buying or selling an investment property, some costs aren’t eligible for tax deductions because they’re considered part of the property’s capital value or personal expenses. Understanding these limits is crucial, especially when it comes to calculating your capital gains and knowing which expenses affect your tax obligations.

Here’s a breakdown of costs that cannot be claimed and may influence how you pay Capital Gains Tax (CGT):

On purchase of the investment property

• Purchase price: This forms part of the cost base and reduces the capital gain when you sell the property.
• Stamp duty: Stamp duty paid on the purchase is not deductible.
• Legal expenses and conveyancing fees: These are capital expenses and cannot be claimed as deductions.
• Property inspection fees: These costs are also considered capital expenses.
• Renovations immediately after purchase: Any renovations completed right after the purchase are not deductible but added to the cost base.
• Repairs immediately after purchase: Similar to renovations, these repairs are not immediately deductible.
• Travel expenses: Travel costs to inspect your rental property yourself used to be claimable but, unfortunately, are no longer deductible.

On the sale of the investment property

• Legal expenses and conveyancing fees: These costs incurred during the sale are not deductible.
• Advertising: Expenses for advertising the property for sale are considered capital costs.
• Agent fees: Commissions paid to agents during the sale are not deductible.
• Cost of reports: Any reports required for the sale are also considered capital expenses.

Why getting expert tax advice will save you money

If you own multiple investment properties, getting expert tax advice is crucial. Managing rental property tax deductions across your portfolio can be complicated, and even small mistakes could lead to financial penalties from the Australian Taxation Office (ATO). By consulting with a tax professional, you’ll understand which rental property expenses you can claim while ensuring compliance with tax laws. This guidance simplifies the process of handling investment property taxes.

A tax expert can also help you maximise deductions related to your investment property expenses, including property management fees and borrowing expenses. With tailored advice, you can be sure of optimising your tax strategy, reducing your taxable income and overall tax burden. For someone with multiple properties, these tax savings can add up significantly, strengthening your financial position and giving you better control over your property investments.