Tax deductions are a crucial part of your cash flow management if you own and manage an investment property. If you are negative gearing your investment property, your running costs can dramatically reduce your overall tax debt from other income sources, such as your salary and wages and business income.
How much income did you receive and how much did you spend on outgoings? These are important questions for investors at the end of the financial year.
Firstly, ensure you keep invoices, receipts and bank statements for all property expenditure, as well as proof that the property was being rented out. You’ll need these in order to substantiate your claim.
Remember you can claim the interest on the loan used to: purchase a rental property; purchase a depreciating asset for the rental property; make repairs to the rental property; finance renovations on the rental property; and purchase land on which to build a rental property. You can also claim the interest you have pre-paid up to 12 months in advance.
In the end of financial year checklist below, I break down what you can claim immediately and what needs to be depreciated over time.
The difference between repairs, maintenance and improvements
Before I jump into the checklist, it is important to understand the difference between the nature of your investment property expenses. Importantly, what is the difference between repairs, maintenance and improvements?
Repair is usually partial repair to restore something to its original state; for example, replacing two palings in a fence. Maintenance, is work that prevents deterioration or fixes current deterioration such as painting the property or oiling the garage door. Improvement makes something better than it originally was. It provides something in a new or more desirable form and generally improves the property’s income production or expected life, for example if you replace an old garage with a brick lock up.
If the work on your investment property is classed as either repair, maintenance or improvement, this will determine if the cost can be an immediate deduction or depreciated over time.
You can claim an income tax deduction for your costs in repairing and maintaining your investment property in the year you pay them, as long as the property is being rented out.
With improvements, you cannot claim a deduction for the total cost, but can claim a capital works deduction or depreciation depending on the type of improvement.
End of financial year checklist
The easiest way to maximise your tax return is to understand what is deductable and what is not, and importantly, that you are keeping concise records of these expenses.
You can generally claim an immediate deduction for your expenses related to the management and maintenance of the property, including interest on loans. If your property is negatively geared you may be able to deduct the full amount of rental expenses against your rental and other income.
You may be able to claim an immediate deduction on expenses including:
- Advertising for tenants
- Body corporate fees and charges
- Council rates
- Water rates
- Land tax
- Cleaning
- Gardening and lawn moving
- Pest control
- Insurance (building, content and public liability)
- Interest expense
- Property agent’s fees and commission
- Repairs and maintenance
- Some legal expenses
- Travel undertaken to inspect the property, collect rent or for maintenance
The below expenses for your rental property may be deducted over a number of income years:
- Borrowing expenses (not including interest, which can be deduced immediately)
- Depreciation (decline the value of depreciating assets such as carpet, furniture and appliances)
- Capital works expenditure (for example an extension, alteration or structural improvement)
Find everything you need to know at tax time at ato.gov.au.
Top image: 9 Oak Street, North Sydney
