Investment property tax deductions: depreciation

The Australian Taxation Office (ATO) allows property investors to claim tax deductions for the depreciation of both the building structure (capital works deduction) and the assets within the property (plant and equipment deduction, which includes items such as dishwashers, fridges, and air conditioning units).

To help maximise depreciation tax deductions, engaging a qualified quantity surveyor who can prepare a depreciation schedule can be helpful. This schedule will outline the depreciable value of each asset and provide a detailed breakdown of the deductions available over the lifespan of the property. By claiming depreciation, property investors can offset the costs associated with the gradual deterioration of their property against their taxable income.

• Capital works deduction - Property investors can claim a deduction for the cost of construction or renovation of the building structure (capital works) over a period of 25 or 40 years, depending on the construction commencement date.
• Plant and equipment depreciation - Items within the property that have a limited effective life - such as appliances, carpets, and blinds - can be depreciated and claimed as a deduction. However, this now only applies to new items, after changes to the legislation in 2017 restricted the ability to claim depreciation on second-hand plant and equipment items.

Investment property tax deductions: repairs and maintenance

Investment property owners can deduct expenses incurred for repairs and maintenance of their property. These expenses include plumbing repairs, electrical work, painting, and general upkeep to ensure the property is in a habitable condition for tenants. The costs associated with pest control and prevention measures, such as termite treatments, can also be claimed as a tax deduction.

Note: whilst expenses for repairs and maintenance are deductible, improvements and renovations are not. Keeping accurate records of all repair and maintenance expenses is essential as evidence that those costs correspond to the amount being claimed, and as proof that the works actually took place, if subsequently requested by the ATO.

Property management fees tax deductions

Engaging a property manager to handle the day-to-day operations of an investment property is common among property investors. The fees paid to property management companies or agents are fully deductible. These fees cover tasks such as tenant selection, rent collection, property inspections, and dealing with maintenance requests.

By outsourcing property management, investors can save time and also benefit from a tax deduction for these associated costs.

Invetment property tax deductions: insurance premiums

Insurance is a vital component of property investment, providing protection against potential risks such as fire, theft, or damage caused by natural disasters. The premiums paid for landlord insurance, building insurance, and contents insurance are all tax-deductible.

Council rates and land tax deductions

Council rates cover the cost of local services such as rubbish collection and disposal, street maintenance, and public lighting. Land tax is a state-based tax on the value of land that exceeds a certain threshold.

Council rates and land tax are obligatory payments that investment property owners must make, but both payments are tax deductible.

Strata fee tax deductions

Strata fees can be included as part of your overall property expenses when calculating your taxable rental income. These fees are considered a legitimate expense associated with owning and renting out the property.

It's important to note that strata fees can only be claimed for the portion that relates to the investment property itself. If the property is used for personal purposes, a deduction can only be claimed for the portion that is attributable to the income-producing use.

Additionally, accurate records must be kept of the strata fees paid, as well as any other associated expenses, to support a claim.

Investment property tax deductions: advertising and marketing costs

When looking for new tenants, property owners often incur advertising and marketing costs to promote their rental property. These expenses - including online listings, newspaper advertisements, and signage - are generally tax-deductible. Again, it is essential to keep a record of these expenses to claim them accurately when lodging tax returns, and for evidence in the event of an audit.

Capital Gains Tax (CGT) concessions

When selling an investment property, there are potential CGT concessions available for holding the property for more than 12 months, such as the 50 percent discount on capital gains or the ability to defer the CGT by reinvesting in another qualifying property.

Investment property tax deductions: negative gearing

Negative gearing is a tax strategy that allows investors to claim investment property tax deductions for any losses incurred from owning an investment property.

The concept of negative gearing applies when the expenses associated with the property, such as mortgage interest payments, property management fees, maintenance costs, and insurance, exceed the rental income generated by the property. The tax deduction can be applied against your other assessable income, like salary or wages.

Understanding the available tax deductions for investment properties in Australia is essential if you are to maximise the financial benefits of property investment. By taking advantage of deductions, investors can significantly reduce their tax liability.

To ensure compliance, as well as to ensuring that all eligible deductions are being claimed, it is recommended that investors consult a qualified tax professional or accountant who specialises in property investment. They can provide personalised advice based on an investors specific circumstance and help navigate the complex regulatory landscape.

By adopting a proactive approach and maintaining accurate records of all expenses, investment property owners can optimise their tax position and enhance the overall returns of their investment property portfolio.

Note: the ATO will now receive data direct from insurers and banks to confirm landlord insurance premiums and loan interest payments. It’s therefore critical to keep accurate records of all your expenses.