Real Estate Investment:Today

Investment Property Tax Benefits Explained

As an investment property owner of around 15 years, I’ve been hit with just about every property tax and expense that you can think of.

Hot water systems suddenly stop working.

Air-conditioning units and dishwashers that no longer turn on.

I once received a sky-high water bill that prompted me to do some digging – it revealed a deep, buried water leak that cost several thousand dollars to locate and repair.

And there was a time a leak from our unit into the property below turned out to be a waterproofing issue, which wasn’t covered by insurance, and cost $10,000 to repair.

The bottom line is that owning an investment property can see you paying a number of unforeseen bills each month.

But, while this might be true, if you buy the right type of quality property in the right location, it can also help you grow your wealth.

And as an added incentive, the expenses involved in owning an investment property help you pay less tax.

Specificity of income tax on investment property

The majority of the costs associated with owning a rental property can be deducted against your regular income tax bill, which reduces the amount of tax you pay overall.

For example,

Let’s say you earn $80,000 a year and in total, you spend $25,000 paying for your investment property, but you receive $20,000 in rental income.

The $5,000 difference between the money you receive in rental income ($20,000) and the money you spend paying for the property ($25,000) is tax-deductible.

That’s $5,000 worth of expenses you can claim against your regular income tax.

That means that the Australian Taxation Office (ATO) would assess your tax as if you’d earned $75,000 instead of $80,000.

So, every week or fortnight, or month, you’ll pay tax as if you earn $80,000, but then when it’s time to file your tax return, you’ll get a refund of any tax paid on the $5,000 difference.

According to current tax rates, that’s around $1,625 back in your pocket.

Not only that, but you can also usually make a claim each year for depreciation, which is an allowance for the wear and tear of the property over time.

Top 15 tax deductions for investment properties in Australia

So what kinds of expenses can you claim when you own an investment property?

The costs can add up pretty quickly, but the upside to shelling out for ongoing maintenance, repairs, and mortgage interest is that the list of expenses you can claim on your tax return is longer than a supermarket receipt.

The following list will help ensure you don’t miss anything.

1. The cost of advertising and marketing for new tenants

Your property manager will charge you for marketing your property or for advertising it for lease.

If you or your agent market your property using online, print media, brochures, and signs, you can claim these advertising expenses against your income in the same year that you paid for them.

2. Loan interest and bank fees

If you have a principal and interest loan against your investment property, while you can’t deduct the principal repayments, you can claim a tax deduction for any interest accrued on your regular repayments as an investment expense.

Interest-only loans are a popular option among investors since they allow them to deduct their full repayments for a period before the loan reverts to both principal and interest repayments.

3. Body corporate fees and charges (not including special levies)

If your property is on a strata title, you can claim the cost of body corporate fees.

These often include common area maintenance and garden expenses, as well as building public liability and insurance.

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4. Building, contents, landlords, and public liability insurance

If you have insurance on your investment property (building insurance, contents insurance, landlord insurance, or public liability insurance) you can claim the cost in your tax return.

Landlord insurance typically covers tenant-related risks such as damage to the contents and building, or loss of rental income.

5. Council rates

Council rates can be deducted in the year that they are paid, although you can only claim them during periods in which the house was rented.

For example, if your investment property was only rented for 219 days of the year, then you can only claim your rates for that period.

This means you would claim 60% (219/365) of the total amount you paid in council rates for your investment property that year.

6. Property management fees

A great real estate agent or property manager helps you achieve the best results from your investment property, with the added bonus of any fees charged being tax-deductible.

The fees of any other expert including a valuer, depreciation expert, accountant, landscape designer, or interior designer are also tax-deductible.

7. Depreciation, relating to the wear and tear of the building and its contents

To claim depreciation you’ll need to get a depreciation schedule prepared at a cost of around $600-$700 (this fee is tax-deductible too).

According to the ATO, a depreciating asset is “an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is in use”.

Examples of assets that deductions for decline in value can be applied to include:

  • timber flooring
  • carpets
  • curtains
  • appliances like a washing machine or fridge
  • furniture

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8. Negative gearing

Negative gearing is a tax strategy that Australians have been using for many years (if not decades) to make the prospect of owning investment properties more manageable and more profitable.

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