“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?
Are you aware of all the income tax deductions that investment property owners like you are entitled to?
Today, we’ll be answering these questions so that you’ll be able to tackle your investment property tax deductions with confidence.
The way you use your property has a direct impact on your tax obligations. To lower your tax bill, it’s essential to understand what taxes you might be obliged to pay depending on what type of property you have.
Always check with a registered property tax consultant to get professional advice for your personal situation.
What's the difference between home property tax and investment property tax deductions?
With your primary residence you generally won't have to pay tax when you sell your home or if you make a profit, but you also can't claim for any expenses incurred when buying or selling your home. Meanwhile, income from an investment property is taxable, and you can also claim certain expenses on your tax returns.
Let's walk through both variants in-depth.
Property taxes on my home explained
If you own and live in your own property, it’s considered your primary residence. That means you generally won’t have to pay tax when you sell your home if you make a profit (but you usually can’t claim for any expenses incurred when buying or selling your home).
However, there are situations where you may need to pay tax on your home, including:
- If you purchase a second property (such as a holiday home) you will be liable for capital gains tax on investment property (more on that below).
- In some states, you might be charged stamp duty when buying your home (as well as a levy land tax if your property is a certain value).
- If you purchase a home with the goal of renovating and selling it for a profit (commonly known as ‘house flipping’) there may be tax and GST implications.
Why is this important?
Well, it can be easy to get caught out by a big tax bill when buying, selling, or renovating a property. By doing your research, checking what taxes might apply, and counting the costs before you make your next move, you’ll save yourself the headache of an unexpected tax bill.
Capital gains tax on investment property explained
As an investor, you’re in the business of generating income from your investment property. When it comes time to sell, you’ll either make a profit (known as a capital gain) or a loss (known as a capital loss). In both scenarios, certain tax obligations apply.
Whether you gain or lose money from the sale of your investment property, you’ll need to report this to the ATO to ensure you’re paying the right amount of tax. While this is referred to as capital gains tax on investment property, it’s actually considered part of your income tax.
If you make a gain, the amount will be added to your income at your next tax return.
As you may be making a gain of potentially thousands of dollars, this can push your total assessable income into a much higher tax bracket (and mean you’ll pay a hefty tax bill).
If you make a loss, you can’t use it to lower your taxable income. However, you can use it to reduce the amount of tax you pay on other capital gains at your next tax return.
What investment property expenses are tax deductible?
The ATO has created clear guidelines about what you can and can’t claim as investment property tax deductions.
As a general rule, you can only claim deductions for expenses related to your investment property when it’s rented out (or genuinely available for rent).
Understanding what deductions you can claim is a great way to reduce the tax you pay on an investment property. So, what expenses can you claim on your investment property?
Rental expenses you can claim in the same financial year:
- Council and land rates & strata fees
- Utility bills
- Property management fees
- Property advertising fees
- Property maintenance and repair costs
- Landlord insurance
- Certain legal costs (such as evicting non-paying tenants)
Rental expenses you can claim over a number of years include:
- Borrowing expenses: costs related to taking out a loan to purchase your investment property (such as loan establishment fees, lender’s mortgage insurance, stamp duty on your mortgage, and more).
- Capital expenditure: including improvements (to help your property generate more income) and depreciating assets (such as carpets, curtains, white goods, and furniture for your investment property).
- Capital works: such as structural improvements, extensions, and alterations.
But, not all of these expenses can be claimed as deductions. Certain conditions apply to some borrowing expenses, depreciating assets, and other investment property expenses that mean you can’t claim them at tax time.
Make sure to check which expenses you might be eligible to claim to ensure you’re getting the most out of your tax return.
Tip: Use a property manager to help manage your taxes
Keeping track of all your expenses to report them to the ATO is a lot of work, and will take up a fair chunk of your time.
If you're left with a bad feeling in your stomach we can recommend bring on board a property manager to help manage tax time. They can prepare annual statements (though sometimes at a charge) that will make it much easier for you to claim all your investment property tax deductions at once.
If you'd like to know more about what this looks like, you can read about how :Different gets owners ready for the end of financial year.
Now that you've got the basics down on investment property tax returns and what you can claim, check out our tips to reduce investment property tax.
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