Unlocking the tax benefits of an investment property
Property investing is a long game. It takes patience and strategy to find the right property at the right time to deliver the returns you’re looking for. But it’s also a long-term strategy with short-term, ongoing benefits. Namely in investment property tax deductions.
The attractive tax benefits of an investment property are what draw many people into the property race as part of their financial strategy. With clearly defined financial goals, you can buy wisely to see early returns, even on a nest egg investment.
While every financial situation is different, understanding the possible tax deductions on an investment property can help you to plan for your own circumstances. In all cases, your financial advisor or accountant can give you personalised financial and taxation advice as to how these deductions apply to you.
Interest on investment loans
The largest tax deduction on investment property in Australia is interest on investment loans. In the 2019/20 financial years, Australians claimed over $21 billion for investment loan interest in their tax returns.
The deduction only applies if the property is genuinely available for rent – i.e. the property is tenanted or advertised for rent. If the loan is partially for private use, only the interest that applies to the investment can be deducted.
Another important distinction to make is that this deduction doesn’t apply to the principal portion of the loan, only the interest paid to the bank.
There are broadly two types of depreciation investors can claim as a tax deduction. The first is capital works depreciation and the second is plant and equipment depreciation.
Capital works depreciation
Also known as building depreciation, capital works deductions apply to wear and tear on a building’s structure. Things that might be considered capital works include a new bathroom, structural improvements or major repairs to the roof or foundation of the building. It also applies to items that are permanently fixed to the property, such as built-in cabinetry, heating and cooling systems and fixed light fixtures. Generally, investors claim these deductions at a rate of 2.5 per cent per year over a period of 40 years.
Capital works deductions typically apply to properties constructed after 17 July 1985. Even if the property is older, significant renovations and extensions may also qualify.
Plant and equipment depreciation
Plant and equipment assets are easily removable and mechanical in nature, such as hot water systems, carpet and smoke alarms. Investors can claim depreciation for wear and tear on these assets. The rate of depreciation varies depending on the elected depreciation method.
Owners of second-hand residential properties can no longer claim deductions for previously used plant and equipment assets. Deductions can only be claimed for brand new properties or for assets installed by the owner since the purchase date.
Ongoing property charges
Owning property – investment or otherwise – comes with a range of other expenses, including:
- Council rates
- Body corporate fees (for strata title properties)
- Water charges (in some scenarios)
- Land tax.
One of the tax benefits of property investment is that these charges may be included as a tax deduction. These expenses are usually paid quarterly or annually and the deductions can be claimed in the year in which the expenses are incurred.
Real estate expenses
Hiring a real estate agent to advertise, lease and manage a property does come with an expense. They will often charge for things like inspections, preparing the lease and an ongoing management fee to liaise with the tenant. These expenses are fully tax deductible.
Advertising the property for lease, including photography, sign boards and rental listings, is also fully tax deductible. As are costs associated with stationery, telephone and postage costs. In some cases, there may be other sundry rental expenses that don’t fit neatly into any other deduction category. An accountant can advise on how to treat these sundries for tax purposes.
Repairs and maintenance
In the 2019/20 financial year, tax deductions for repairs and maintenance amounted to $2.8 billion.
General repairs include things like repairing a leaky faucet, fixing a broken window or patching up a hole in the wall. This is usually a one-off fix to restore something that’s broken, damaged or deteriorated. Routine maintenance, such as roof inspections, servicing appliances, cleaning and pest control can also be claimed as tax deductions.
In an apartment, unit or townhouse, the landlord is typically responsible for maintaining the lawn and gardens. In a single-dwelling, the lease may stipulate whether garden and lawn maintenance is the landlord or tenant’s responsibility. In any case where the landlord is responsible, any associated costs are tax deductible. This includes fees for hiring a professional gardening/lawn mowing service or the cost to purchase equipment exclusively used for this purpose.
There are a number of costs involved in purchasing a property. This includes:
- Loan establishment fees
- Lenders’ mortgage insurance
- Stamp duty
- Title search fees
- Preparing and filing mortgage documents
- Mortgage broker fees
- Valuation fees.
If the borrowing expenses are less than $100, they can be fully deducted in the year they’re incurred. Expenses greater than $100 are spread over a period of five years or the term of the loan, whichever is less.
Maximise the tax benefits of an investment property
Deductions are just one part of the investment puzzle. Before you buy an investment property, you need to assess your financial situation and define your goals. Without this step, you’re investing blind and not making the most of the tax benefits of an investment property.
When you get it right, the benefits are impressive. Take your tax savings to invest in continuing to grow your property portfolio or invest the money back into your current property. It’s all part of a strategic approach to investing wisely to build wealth.
For the last two decades, I’ve helped my clients to invest well in property. From assessing your investment readiness to structuring your cashflow management, I then find you the properties that will match your investment goals and situation. It’s the faster, smarter way to grow your wealth; putting money in your pocket without you having to lift a finger.
Book a wealth accelerator call and I can show you how property investment can help you build financial security and freedom.
The information in this article is general in nature and does not constitute financial advice. You should seek independent legal, financial, taxation or other advice for your own unique circumstances.