Many people choose to purchase property as part of their investment property strategies as it can provide them with a very tangible asset that often increases in value over time.
If you are thinking of investing in property or you have already done so, it pays to be aware of which expenses you can claim on your investment at tax time, and which ones you cannot.
And with tax time fast approaching, now’s the time to get ready!
1. Expenses you can claim as immediate deductions
If you borrow from a lender to buy a rental property, you should be able to claim a number of borrowing expenses, including:
- Interest on your mortgage. This includes prepayment of interest in advance.
- Interest charged on loans taken out for property improvements – such as repairs or renovations,
or for the purchase of a depreciating asset (such as installation of heating or air conditioning.
- Valuation fees charged for loan approval purposes.
- Lender’s mortgage insurance.
- Loan establishment fees.
- Title search and valuation fees charged by the lender.
- Legal fees for the preparation of mortgage documents.
- Lender’s mortgage insurance.
Expenses incurred in managing your investment:
- Body corporate fees.
- Agent fees and commissions for property management.
- Costs for cleaning and gardening.
- Repairs and maintenance for wear and tear.
- Insurance costs relating to the property.
- Land tax.
- Council and water rates.
- Pest control.
- Eviction costs.
- Court action costs – for example those that relate to loss of rental income or for defending a damages claim.
- Travel expenses – for example where travel was done specifically for property inspections, collection of rent,
or for maintenance purposes.
- Miscellaneous expenses such as phone, postage and stationery relating to the property.
2. Expenses you cannot claim
- Any expenses relating to private use of the property.
- Stamp duty incurred by your State Government (although you may be able to claim stamp duty charged by your lender as a ‘borrowing expense’).
- Initial property repairs to prepare the property for renting and renovation and construction work done on your property, as these would come under ‘capital works’. However you may be able to claim ‘capital works deductions’ for these expenses at the rate of 2.5% per annum.
- Legal fees for purchase of the property – such as conveyancing, valuation fees done by your legal representative, and title search fees.
3. Other tax tips
- Always keep all your paperwork relating to the rental property, including loan documents and receipts for repairs and maintenance.
- Get professional tax advice from a property tax specialist regarding depreciation and capital works deductions.
- Consider prepaying your interest charges a year in advance if you wish to reduce your tax liabilities in the current financial year.
- If you have property overseas, you will need to tell the tax office about any income earned on this property and you will also be able to claim expenses incurred.
Claiming expenses on investment properties is fairly complex. Some expenses for instance can be claimed immediately, while for others claims are done over a period of several years. Differentiating between legal expenses for borrowing purposes and those for property purchase purposes can also be tricky.
This article contains general information. We recommend getting expert tax advice from a property specialist tax accountant to ensure that you cover all bases and don’t miss out on claiming legitimate expenses relating to your investment property, and to avoid some of the common errors that investors tend to make.
Posted by: Chan & Naylor Property Tax Accountants (Offices Nationally)