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You feel the chill in the air, winter is coming and that can only mean one thing - it’s tax time.
Whether you only just recently acquired your first investment property, or you’re already investing in a substantial real estate portfolio, are you aware of all the income tax deductions that investment property owners like you are entitled to?
“Exactly what investment property expenses are tax deductible?” is a question that’s constantly asked, even by owners with multiple properties under their belt. Are rates tax deductible on an investment property? What about the painting job you did earlier in the year?
Today, we’ll be answering these questions so that you’ll be able to tackle your investment property deductions with confidence.
Read on for our crash course on how to optimise your investment property tax deductions. Remember to check with a registered property tax consultant to get professional advice for your personal situation.
1. Keep, keep, keep
The easiest way to get a tax break on your investment property is through tax deductions.
Just like every other income tax deduction claim, to claim deductions for your investment property, the most important things you’ll need to keep track of are your receipts and bank statements. On top of that, you will also need to keep an accurate depreciation schedule and capital works schedule, which we’ll cover in section 4 of this article.
There are countless different ways you could go about organising these documents - by keeping physical statements in a binder, by manually filing them in a folder in your computer, by using apps like Expensify that keep track of your expenses... and the list goes on.
For your home and property management related tax deductions, you'll benefit from having them all in one place.
Here at :Different, our intelligent tech keeps track of records and helps reduce our owners’ workload during tax time. All your statements are automatically linked to your account and can easily be accessed via our owner app or online portal.
With everything well-organised and accessible from the tip of your finger, sorting your taxes will be a breeze - and, you’ll easily be able to make sure you’re claiming every tax deduction possible.
Here's a sneak peek of how your investment property related expenses are tracked on our owners' app:
See how we organise your bills & statements
For owners who prefer desktop over mobile, we've got you covered - our owners' portal has everything you need in one place, whenever you need it.
2. Expenses that can be claimed in the same financial year
So you’ve kept all your receipts and a record of expenses for the financial year, but the question remains: what can I claim on my investment property?
Regular day-to-day expenses can usually be claimed in the same tax year that you paid for them. You can also claim tax deductions for investment property repairs and maintenance.
Expenses you can claim include, but are not limited to:
- council and land rates
- utility bills
- strata fees
- property advertising fees
- property management fees
- property repair and maintenance costs
- landlord insurance
If you’ve employed the help of a property manager, they should be able to manage all these day-to-day expenses for you. Once you reach the end of financial year, they’ll have all the statements you need for your investment property tax deductions.
How :Different can help
Our team of experts backed by intelligent technology can make managing your expenses a breeze. Talk to one of our friendly property experts to find out how we can help during tax time.
3. Capital assets and borrowing expenses
You can also get tax breaks on your investment property’s capital asset expenses and borrowing expenses. However, whether you will be able to claim the full expense as a rental property tax deduction in the same year will depend on the value of the expense.
Capital items valued over $300, such as washing machines and fridges, have to be claimed over time.
These items are also known as depreciating assets, as they have a limited effective life and will have their value decline over time and use.
For these assets, you can claim the total cost over its expected life. Some items have special rules that allow you to claim tax deductions more quickly. This guide by the ATO covers in detail the rules around claiming tax deductions for capital assets and how to work out their effective life.
Capital item expenses under $300 can be claimed immediately in the same financial year you purchased them in. However, note that if the item is part of a set of items (e.g. you bought 1 dining chair for $250 as a set of 4 dining chairs), then you cannot claim the full deduction immediately as the total value of the set of items is over $300.
The tax deduction for borrowing expenses over $100 are spread over 5 years, or the term of the loan, whichever is shorter. Borrowing expenses under $100 can be claimed as a tax deduction immediately for the same income year.
Borrowing expenses include any expenses associated with taking out a loan for your investment property. Some examples of this is are:
- loan establishment fees
- lender’s mortgage insurance (insurance taken out by the lender and billed to you)
- stamp duty charged on the mortgage
- title search fees charged by your lender
- costs for preparing and filing mortgage documents (including solicitors’ fees)
- mortgage broker fees
- fees for a valuation required for a loan approval.
This worked example provided by the ATO shows how tax deductions for borrowing expenses are calculated and could be useful for you to calculate the tax break for your portfolio.
4. Depreciation and capital works schedule
To make sure you’re getting the most from your investment property deductions, it’s important to keep an accurate record of your depreciation and capital works schedule.
A depreciation schedule is a record of the property’s capital assets valued over $300, and it outlines how much you can claim in depreciation each year.
Since you can expect many of your capital assets (e.g. washing machines, carpets, etc.) to depreciate over time, you’ll be able to claim deductions over the course of its life.
Similarly, you can claim capital works deductions over a number of years for certain construction costs. This means that even work done building your investment property can become an income tax deduction.
A capital works schedule is a useful record of all the construction and building related work for your investment property.
It consists of:
- Preliminary expenses such as surveying, architect and engineering fees
- The cost of building permits
- The cost of building and construction materials
- the cost of altering or extending a building
- the cost of capital improvements to the surrounding property or structural improvements to the existing property
This schedule is also crucial when calculating the amount of tax deductions you can claim each year for your investment property. Typically, you can claim tax deductions for capital works for 40 years after the work is completed. To be eligible for this tax deduction from the ATO, your property needs to satisfy two conditions:
- Be built after July 1985
- Is being rented or genuinely available for rent
The ATO also provides a handy tool for you to calculate your depreciation and capital allowance, which you can access here.
Your property tax consultant will be also able to explain and help you work out how much and over how many years you can claim your tax deductions in more detail.
It's important to know that if you can’t accurately work out the building expenses of your property, the ATO only deems quantity surveyors as suitably qualified to provide the schedule. That means that although your accountant can help you keep an accurate schedule, they cannot estimate the construction costs for you.
5. Tax breaks on negatively gearing your investment property
If the rental income on your property is less than your interest payments and expenses for the year, then your property is negatively geared. You might be wondering - is this a bad thing? Not necessarily.
Negative gearing is a strategy some use on their investment properties to claim a tax break.
Although you can’t gain any tax deductions directly through negatively gearing your investment property, you’re able to reduce your taxable income, which indirectly reduces the amount of tax you pay.
This means that you will be eligible to deduct the loss from your taxable income.
If you’re looking to minimise the amount of tax you pay on your investment property, you can keep this investment strategy in mind.
Check out this guide by The Treasury if you want to learn more about negatively gearing your investments.
How a property manager can help during tax time
Now you know what investment property expenses are tax deductible - but how can a property manager help?
A manager with a great property management system can help you keep all your expenses in one place. That way, you’ll less likely need to embark on a statement hunt through email after email, or through the stacks of paperwork in your home, at the end of every financial year.
To make the most of your property manager’s services for tax purposes, it’s incredibly helpful to ask them to organise and pay all contractors, rates, and other expenses.
Making tax time easier for owners with our EOFY pack
In a survey we conducted with our owners leading up to end of financial year this year, 78% expressed that compiling statements and receipts was their biggest tax-time pain point. In response, we rolled out an EOFY pack that made tax time easier for 1413 owners.
We sent EOFY packs containing:
- An annual EOFY summary statement
- A detailed income and expenses breakdown for the financial year
- A list of downloadable invoices from 1 July 2019 to 30 June 2020
How is it that we’re capable of doing this?
At :Different, we use tech to make life easier for our owners. When we’re managing your bills and payments, everything goes through our system - from council rates and strata to maintenance payments and energy bills, you can easily access everything from the tip of your finger on our owners’ app and portal. You can try our owners’ portal demo here.
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We’re a new kind of property manager, combining the best people and intelligent technology to give you complete peace of mind for $100/month. You can learn more about us on our website.
The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.