Investment Property Tax Deductions: Are you getting it right?

Are you worried that you might not be claiming all available tax deductions for your investment property? Below are some things you should be considering in relation to tax deductions for your investment property.

Structuring your loans – be careful!
Most people’s first investment property is their first home – after they decide to upgrade to another home, instead of selling their first home, they keep their first home as an investment property.

For example, your current home is worth $300,000 and you have a home loan of $150,000. You want to buy a new home for $450,000 to live in and rent out your current home. You are able to redraw $90,000 on your current loan to pay a deposit on your new home and you will take out a new loan for the remaining $360,000. However, only 62.5% of the interest on your existing home loan (now $240,000) will be tax deductible, as a portion of it ($90,000 or 37.5%) was used to purchase a non-income producing asset.

To avoid the above scenario, you could direct any repayments above the required minimum repayments to a loan offset account, rather than directly paying down the loan.

Structuring of tax deductible debt seems simple, but it is extremely costly to you if you get your debt structuring wrong.

You are allowed to claim a tax deduction each year for the wear and tear (or depreciation in value) of both the construction costs of your investment property and the plant and equipment inside the property (ie. oven, dishwasher, blinds, carpet, etc.). On new properties, total tax deductions from depreciation can be reasonably high, with one Quantity Surveyor1 suggesting some new 3 bedroom, $450,000 properties can have first year depreciation of $13,000 and total depreciation over 5 years of $57,000. At the 34.5% marginal tax rate, this is a $4,485 tax saving in year 1 and $19,655 total tax saving over 5 years.

However, there is a catch. The depreciation claimed on the construction costs comes off the cost base of your property and therefore potentially increases capital gains tax when you sell the property.  However, given capital gains a more favorably taxed than taxable income, you will normally be better off claiming depreciation as a deduction. If you are eventually taxed on capital gains at the same rate as you claim the deduction, you will pay upto half the tax saving back in capital gains tax. However, the fact is, many people wait until retirement to sell investment properties, when their tax rate is close to 0% and may not pay any capital gains tax at all.

So what do you need to do to claim depreciation as a tax deduction? You will need to organize a Quantity Surveyor to prepare a Depreciation Schedule. This may cost anywhere between $500 and $1,000, depending on the property and is tax deductible.

If your property is older, a Depreciation Schedule may not be worthwhile. Speak to your accountant if you are unsure.

What else can you claim as a deduction?
We have listed below a number of investment property expenses you may be able to claim as a tax deduction. This is not an exhaustive list:

  • Advertising for tenants
  • Bank charges
  • Body corporate fees
  • Cleaning
  • Council rates
  • Electricity and gas
  • Gardening and lawn mowing
  • In-house audio/video service charges
  • Insurance – building, contents, public liability
  • Interest on loans
  • Land tax
  • Legal expenses for tenant dsiputes
  • Lease costs – preparation, registration, stamp duty
  • Mortgage discharge expenses
  • Pest control
  • Property agent’s fees and commissions
  • Quantity surveyor’s fees
  • Repairs and maintenance
  • Secretarial and bookkeeping fees
  • Security patrol fees
  • Servicing costs e.g. servicing a water system
  • Stationery and postage
  • Telephone calls and rental
  • Tax-related expenses
  • Travel and car expenses – rent collection, inspection of property, maintenance of property
  • Water charges

Remember, you have to actually incur the expense to claim a deduction, for example, if your tenant pays for water, you can’t claim the cost as a deduction.

If you are unsure about tax in relation to your investment property or if you are considering buying an investment property, call or email Michael Spittles () or Dean Welbourne () on 02 6883 2200 to discuss what deductions you should be claiming.