All property investors must consider tax deductions. Australia has clear rules in place. The Australian Taxation Office (ATO) outlines the basics, but here’s what you really need to know.
There’s one key question to ask yourself when you buy an investment property.
What can I claim?
It’s a simple question, but one that doesn’t have an easy answer. There are several rental property deductions. ATO guidelines provide some indication of what you can claim.
However, you need a more comprehensive guide that covers investing in property for beginners. Here’s what you need to know.
What Can You Claim?
The expenses that you can claim fall into two categories:
- The costs of maintaining and managing the property.
- Depreciation of your assets
How you claim for each varies. You can usually lodge claims for maintenance and management immediately. With ongoing costs, such as asset depreciation, you’ll claim over several years.
Maintenance and Management Expense
Several expenses fall under the maintenance and management banner. These include the following:
- The fees you pay to any property managers
- The cost of your insurance premiums
- Any advertisements that you take out to attract new tenants.
- The rates you pay for water and to the council.
- Travel expenses incurred when you inspect the property.
We know what your big question is though.
Is interest on a home loan tax deductible?
Happily, it is. In fact, many people build this deductibility into their loan repayment efforts. You can claim for the interest on your mortgage, giving you some leeway for handling personal debts. With the correct management, you can use this to improve your credit score. This sets you up for later investments.
Depreciation of Your Assets
Your investment property will usually contain assets. This may include furniture, or even some shared assets if you have a unit in an apartment block.
These assets lose value over time. As a result, they depreciate. However, you can make claims against this depreciation.
You’ll need a Quantity Surveyor. These professionals visit your property and take stock of every asset that you have. They’ll then create a depreciation schedule. This works out how much you can claim for each asset every year.
The best depreciation schedules also break your assets down into short and long-term claims.
Beyond this, you can also claim for capital works. This covers most modifications to your building and any construction work. Again, you’ll claim for this work over several years.
For example, you may be able to claim for construction work at a rate of 2.5% for 40 years. However, this is only possible for properties built after a certain date.
Accuracy is key. Without the proper schedules for each, you won’t maximise your tax deductions. Australia also has several rules for you to follow when claiming for depreciation over a long period. Speak to a qualified professional to ensure you don’t make mistakes.
What Do I Need to Make Claims?
Documentation is the key to making successful claims for tax deductions. Australia has strict rules in place. If you can’t prove the claim, you can’t make the deduction.
Keep a record of any official documents that relate to the property. This includes any receipts for work carried out and your bank statements. Also, keep records of any construction work undertaken. You’ll need these to show that you’re making legitimate claims.
You’ll also need a property tax depreciation schedule, which you can create with a Quantity Surveyor. Have a new schedule created whenever you replace or repair an asset. This ensures you maximise your deductions, rather than claiming for old assets that you no longer use.
What Can’t I Make Claims For
It’s also important that any claims you make follow these conditions:
- They’re made during periods when the property is being rented or is available to rent. You cannot claim the above expenses if you’re living in the property yourself.
- You can’t include any expenses that your tenants pay. For example, you can’t claim water rates as a deduction if the tenant pays them.
Claiming for acquisition costs adds another wrinkle. You can’t make income tax claims on the cost of purchase or the stamp duty. You also can’t deduct conveyancing costs or any other fees related to the purchase.
Instead, you’ll add these fees to the property’s cost base. This becomes relevant when you sell the property. Each sale incurs Capital Gains Tax (CGT). You can use these expenses to lower the CGT you pay.
The Final Word
You must understand deductions before buying an investment property. Australia’s taxation laws could trip you up. If you make incorrect deductions, you place yourself at risk of fines and legal action.
To avoid this situation, contact Washington Brown today. We can provide you with a Quantity Surveyor who’ll ensure you have an accurate depreciation schedule.