Investment property tax deductions
If you’ve just bought an investment property or are looking to buy one, you need to understand the tax consequences and what you can and can’t claim. Here’s H&R Block’s simple guide to how investment properties affect your tax return.
Rental income on an investment property
The income received is taxable to the owners of the property in the same proportion as the ownership interest as shown on the title.
The rent received must be at normal market rates to be able to claim all the expenses in full. If you rent at below market rent (to family or friends perhaps), you can only claim deductions up to the amount of rent charged. The rent must be declared in the year it’s received.
Investment property expenses you can’t claim
Many of the costs relating to the purchase or sale of the investment property can be included in the cost base for capital gains tax purposes but can’t be deducted from your rental income. It’s essential that you keep detailed records of your spending from the get go.
Unfortunately, you can’t claim any tax relief for the following expenses:
- Those relating to your personal use of the rental property
- Expenses, such as utility bills, paid by the tenant
- Borrowing costs where you have borrowed against the equity in the investment property for private use
A deduction can’t be claimed for the costs of acquiring or disposing of the rental property, except in the ACT where properties are leasehold and stamp duty and legal expenses are allowable. Examples of these expenses include the purchase cost of the property, conveyancing costs, advertising expenses, building inspection reports, travel to view the property prior to purchase and stamp duty on the transfer of the property. However, these costs may form part of the cost base of the property for Capital Gains Tax purposes.
H&R Block tax consultants can help you identify all eligible costs which can be included in the cost base. Getting this right from the onset might reduce any capital gain or increase any capital loss which can then be carried forward indefinitely and offset against future capital gains.
Understanding the cost base of an investment property
The cost base is made up of the purchase price of the property along with many of the costs associated with the purchase, holding and sale of the investment property. This generally includes stamp duty, broker fees, loan application fees, legal expenses, auctioneer’s fees and capital improvement outlays involved in fixing up the property.
Claiming interest on an investment loan
Interest paid on the loan used to purchase the investment property is tax deductible, provided that all the money borrowed was used to purchase the property. For accounts that are a line of credit and used privately as well, the interest claim needs to be apportioned for the private expenses.
Tax deductions for investment properties
With the government recently narrowing the type of property deductions residential investors can claim, getting your taxes right just got more complicated. Lodging an incorrect investment property tax return could result in fines and penalties. To avoid an incorrect lodgement and get the greatest return on your investment, talk to an H&R Block tax consultant.
Claiming repairs on an investment property
You can claim any repairs made to the property during the period it is leased. Generally speaking, repairs carried out within the initial 12 months of owning the property can’t be claimed (these can be used to reduce a capital gain when you sell the property).
Claiming improvements on an investment property
Improvements you make to the property are not deductible in full, rather, they need to be depreciated and claimed over their effective life.
Other deductions you could claim
Other claimable expenses can include:
- Advertising for tenants
- Bank charges
- Body corporate fees
- Council rates
- Electricity and gas
- Lawn mowing
- In-house audio/video service charges
- Land tax
- Legal expenses
- Lease costs
- Lenders mortgage insurance (usually written off over the shorter of the term of the loan or 5 years)
- Pest control
- Mortgage discharge expenses
- Property agent’s fees
- Quantity surveyor’s fees
- Water charges
Building cost write off
If the building in question is under 25 years old, you may be entitled to claim a deduction of 2.5% per year of the original cost of construction for up to 40 years from the original date of construction. If you don’t know how much it cost to build, you can contract a quantity surveyor to determine the costs and prepare the depreciation schedules for the property to determine what can be claimed.
The service we recommend is BMT Tax Depreciation and the good news is that their fee is tax deductible and discounted to $705 for our clients.
Keeping records for investment properties
Firstly, ensure that you keep good records. As a golden rule – if you can’t substantiate it, you can’t claim it. Make sure you keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.
You might find our record card for property investors, handy – just ask one our tax consultants for a free copy at one of our offices. While you’re getting organised, our Taxsaver envelopes can help you keep all your receipts and documents tidy for tax time. Remember, if you’re not sure you can claim an expense, keep the receipt and we’ll ensure that we claim all allowable deductions and rebates for you whilst preparing your tax return.
If you’ve used another tax agent to lodge your investment property tax return and you’re not convinced you got the best outcome, take advantage of our free second look assessment. Simple bring in a print-out of your current and/or past years' tax return(s) and we will review your tax return and check that you received the maximum tax refund. If we find any deductions, offsets or benefits that you are entitled to, we can lodge a tax return amendment and get you the extra refund.
Lodging a tax return with an investment property
To obtain the best possible tax outcome, we want to ensure you capitalise on your property investment. As Australia's leading property taxation experts, we keep on top of every single tax concession affecting investments like yours.
H&R Block can help
Let us lodge your tax return for you.
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- Lodge your tax return online with H&R Block