Maximising On Your Investment Property Tax Return

INVESTING

31 July

Whether you’ve just purchased your first investment property in Australia, are looking to buy, or are a veteran when it comes to the property market, there are a number of things to be aware of when it comes to filing your tax return. Tax can be complex at the best of times, so I’ve tried to create an easy-to-follow list that will hopefully be just as easy to remember.

What To Include In Your Tax Return: CHECKLIST

1. Rental Income

When it comes to rentals, any money you receive from renting out your property, including extra fees, counts as income for tax purposes. This applies regardless of whether you own the entire property or just a portion of it. You need to report this income on your tax return for the financial year you received it.

To be able to claim all of your rental expenses in full, the rent you charge needs to be at the usual market rate. If you charge less rent, you can only deduct expenses up to the amount of rent you actually receive.

2. Expenses: From Costs to Savings

Owning a rental property can be a great investment, but it also comes with ongoing costs. The good news is that many of these expenses can be claimed as tax deductions, helping you reduce your taxable income from the property. Here’s a breakdown of some common deductible expenses:

Marketing and Tenant Finding

Advertising for tenants: This includes costs associated with online listings, newspaper ads, and “for rent” signs.
Leasing costs: Fees paid to property agents for finding tenants and managing lease agreements.

Property Upkeep

Cleaning: The cost of regular cleaning services to maintain the property for tenants.
Gardening and lawn mowing: Expenses for keeping the yard in good condition.
Repairs and maintenance: Costs associated with fixing broken appliances, plumbing issues, or general wear and tear. Repairs maintain the existing property, while improvements add value and are treated differently (see Improvements below).
Pest control: Costs of professional pest control services to ensure a comfortable living environment for tenants.

Regular Bills and Fees

Council rates: Local government fees levied on the property.
Body corporate fees: Fees paid to a body corporate if the property is part of a complex or development.
Water charges: Costs associated with water usage at the property.
Electricity and gas: Utility bills for the rental property.

Financial Costs

Interest on loans: The interest you pay on mortgages or other loans used to purchase or improve the property.
Bank charges: Fees associated with your rental property bank accounts, like loan establishment fees or account maintenance charges (check with your tax advisor on specific deductibility).

Professional Services

Property agent’s fees: Fees paid to property agents for managing the rental property, including collecting rent and handling tenant issues.
Quantity surveyor’s fees: Costs associated with obtaining a depreciation schedule for the property (see Improvements below).

Other Deductible Expenses

Stationery and postage: Costs associated with managing the rental property, such as printing lease agreements or sending communication to tenants.

Improvements (Important to Note)

While not fully deductible in the year they are incurred, improvements to the property can be depreciated and claimed over their effective life. This means you spread the cost of the improvement out over several years as a tax deduction.

3. Avoid Tax Time Surprises: Expenses NOT Deductible for Rentals

Owning a rental property offers great investment opportunities, but it’s important to understand which expenses you can deduct from your taxable income. Here are some common costs that don’t qualify as tax deductions:

Buying and Selling Costs: This includes the purchase price of the property, stamp duty, legal fees associated with buying or selling, and advertising costs to sell the property.
Tenant-Paid Bills: Utilities like water and electricity paid directly by your tenants are their responsibility, not yours.
Vacancy Periods: If your property is vacant and not available for rent, you can’t deduct expenses incurred during that time.
Marketing and Listing Expenses: Costs associated with finding tenants, like advertising or property manager fees to locate a tenant, are not deductible. However, property management fees for ongoing management are deductible.
Moving Between Properties: Costs associated with relocating furniture or equipment between rental properties before renting them out are not deductible.
“How-To” Investments: Expenses for seminars or courses related to finding rental properties are considered personal development and are not tax-deductible.
Travel Expenses: Costs associated with traveling to inspect the property, perform maintenance, collect rent, or meals and accommodation during these trips are not deductible.

Uncertain? Keep Those Receipts!

If you’re unsure whether an expense qualifies for a deduction, it’s always best to keep the receipt. When you file your tax return, a tax professional can review your records and ensure you claim all the allowable deductions for your rental property.

4. Borrowing Costs

When you take out a loan to buy a rental property, some upfront costs are associated with the loan itself. These are called borrowing costs. Here are some examples:

Lender's mortgage insurance (LMI)

You pay this insurance premium if your down payment on the property is less than a certain percentage (usually 20%). It protects the lender if you default on the loan.

Loan establishment fees

These are charges from the lender for processing your loan application.

Title search fees

These fees cover the cost of researching the property’s ownership history to ensure no outstanding claims.

Tax Tip: In many cases, you can claim these borrowing costs as tax deductions. However, there are some limits.

Spreading the deduction

If your total borrowing costs are over a certain amount (e.g. $100), you may need to deduct them over a period of several years (often five years) instead of claiming them all at once.

Limits on deductions

Some costs, like insurance premiums for loan protection, are not tax-deductible.

It’s important to check with a tax professional to understand the specific rules and limitations in your area.

5. Lower Your Tax Bill With Building Depreciation

Did you know you might be able to reduce your tax bill by claiming depreciation on your rental property? Here’s how it works:

Over time, buildings naturally wear down. This loss in value is called depreciation.
The Australian tax office allows you to claim a portion of this depreciation as a tax deduction each year. This essentially reduces your taxable income from the property.
To claim this deduction, you’ll need to know the original construction cost of the building. A quantity surveyor can help you determine this value and create a depreciation schedule for your property.

Important Note: This applies to investment properties purchased before May 9th, 2017. For properties purchased after that date, depreciation deductions are limited to specific assets within the building, not the entire structure.

6. Avoid Mixing Investment and Personal Funds: Keep Your Deductions Safe!

Sometimes, when you have an investment property loan, it can be tempting to use it for personal expenses. However, this can create a “mixed loan”, which can be a headache come tax time. Here’s why:

Tracking Interest Deductions Becomes Complex: If you use your investment loan for personal expenses, figuring out how much interest you can claim as a deduction for your rental property becomes difficult.
Losing Deduction Benefits: In some cases, using your investment loan for personal needs could disqualify you from claiming any interest deduction on the property. That could mean a higher tax bill!

Here’s the Smart Approach:

Separate Loans: It’s best to have separate loans for personal expenses and investment properties. This keeps things clear and simplifies your tax filing.

By following these tips, you can avoid the hassle of mixed loans and ensure you’re maximising the benefits from your investment property tax return.