HOW INVESTMENT PROPERTIES AFFECT YOUR TAX RETURN
If you’re looking to buy an investment property or you have just bought one, you need to understand your tax obligations, including which deductions you can claim. This is our simple guide to how investment properties affect your tax return.
WHAT INFORMATION DO I INCLUDE IN MY TAX RETURN?
RENT
Rental and other rental-related income is the full amount of rent and associated payments that you receive from tenants when you rent out your property. Profits/losses from your investment property needs to be included in your individual tax return to the extent you own a legal interest in that property. The rent must be declared in the year it is received.
To be able to claim all the expenses in full, the rent received must be at normal market rates. If you rent at below market rent (to family or friends perhaps), you can only claim deductions up to the amount of rent charged.
EXPENSES
Expenses for which you may be entitled to claim an immediate deduction in the same year you incur the expense include:
- Advertising for tenants
- Bank charges
- Body corporate fees
- Interest on loans
- Cleaning
- Council rates
- Electricity and gas
- Gardening
- Lawn mowing
- Insurance
- Repairs and maintenance
- Lease costs
- Pest control
- Property agent’s fees
- Quantity surveyor’s fees
- Stationery
- Postage
- Water charges
- Improvements – not deductible in full but can be depreciated and claimed over their effective life.
BUILDING COST WRITE OFF
You may be entitled to claim depreciation of the original cost of construction of the building for your investment property. You can contact a quantity surveyor to help you determine the building costs and prepare the depreciation schedules for your property. These deduction can be claimed at tax time.
For investment properties that were purchased after 9 May 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by the investor.
BORROWING COSTS
These are expenses directly incurred in taking out a loan for the property. They include:
- lender’s mortgage insurance billed to the borrower
- loan establishment fees
- title search fees charged by your lender
If your total borrowing expenses are more than $100, the deduction is spread over five years or the term of the loan whichever is less. If the total deductible borrowing expenses are $100 or less, they are fully deductible in the income year they are incurred. Insurance policy premiums on a policy that provides for your loan on the property to be paid out in the event that you die or become disabled or unemployed, are not deductible.
INVESTMENT LOAN USED FOR PRIVATE PURPOSES
It is important to avoid using the establised investment property loan for personal drawdowns, as this could risk creating a mixed loan. It is very hard to determine how much interest can be claimed for an investment property that has private drawdowns on it, and in some cases you could lose the ability to deduct interest as an expense for the investment property completely. The safest strategy is to always have a different loan for personal assets, and each investment property should have its own separate loan.
EXPENSES YOU CANNOT CLAIM AS DEDUCTIONS
Expenses you are not able to claim as rental deductions include:
- Acquisition and disposal costs of the property
- Expenses not actually incurred by you, such as water or electricity usage charges paid directly by your tenants
- Expenses associated with periods where your property (including your holiday home) was not genuinely available for rent
- Expenses associated with making the property available to rent
- Expenses incurred in relocating assets between rental properties prior to renting
- Expenses for rental seminars about helping you find a rental property to invest in
- Travel expenses to inspect, maintain or collect rent for the property, and costs of meals and accommodation related to such travel
Remember – if you are not sure if you can claim an expense, keep the receipt and we will ensure that we claim all allowable deductions for you whilst preparing your tax return.
PROPERTY AVAILABLE FOR PART-YEAR RENTAL
Examples of properties you may use for both private and rental purposes are holiday home, airbnb and time-share units. In cases such as these you cannot claim a deduction for any expenditure incurred for those periods when the home or unit was not genuinely available for rent – including when it was used by you, your relatives or your friends for private purposes.
