The impact of tax deductions on investment property

Property is a popular investment asset that contains a number of significant advantages including income generation, capital growth, resistance to major market downturns and substantial tax deductions.

Although tax deductions and offsets shouldn’t be the key reason to invest in property, if you have purchased a property make sure that you use every concession available to you.

Deductible expenses

There are three categories of rental property expenses:

1. Expenses to be claimed in the same income year you incur the expense. These include body corporate fees, property management costs, insurance, rates, gardening and lawn mowing services, pest control, lease document expenses, interest on loans used to purchase the property, and land tax.

2. Expenses to be claimed over a number of income years. These include:

  • the decline in value of depreciating assets such as furniture, curtains and carpets in new properties only;
  • borrowing expenses including loan establishment fees, broker fees, mortgage insurance, stamp duty charged on the mortgage, valuation costs, title search fees and costs for preparing and filing mortgage documents;
  • capital works deductions that are generally spread over a period of 25-40 years, eg. room, garage, patio or pergola additions, building alterations, or structural improvements.

3. Expenses unable to be claimed as tax deductions

These include purchase and disposal costs of the property, expenses not actually incurred by you (eg. tenants’ water and electricity charges), or expenses not related to the rental of a property, such as those relating to your personal use of a holiday home that you rent out for part of the year.

An amendment to tax legislation arising from the May 2017 Federal Budget means that property investors can no longer claim depreciation for plant and equipment, such as air conditioning, solar panels or carpet, in established residential properties. This rule affects contracts exchanged after 7:30pm on May 9, 2017 only.

Important to remember

  • Your capital works deductions are not available until the construction is complete.
  • If you can claim capital works deductions, the construction expenditure on which those deductions are based cannot be used for any other type of deductions.
  • Working out an accurate level of depreciable items can be complicated so it might be a good idea to employ the services of a Quantity Survey.
  • Deductible expenses need to be applied proportionately if your property is available for rent for only part of the year, if only part of your property earns rent, or if you rent out your property at below-market rates.

As with anything to do with tax, claiming the correct deductions on your investment property can be complex. Talk to a licensed advisor to guide you through the maze and ensure you make the best of your investment.