Advertising for tenants
This is a claimable expense if it is strictly advertising for tenants and your property is available for rent. These costs include: advertising with local real estate agencies, and posting advertisements in newspapers, local publications or online. Advertising for the sale of a property is a capital expense and can only be taken into consideration as part of the cost base of the property on disposal.
The bank charges on your loan account (usually in the form of monthly fees) are tax deductible as well as any bank charges on a separate bank account that you have specifically set up for your investment property.
These are costs associated with the borrowing of money required to purchase the property and although not deductible upfront, they are deductible over the shorter of either the period of the loan or five years. These include mortgage insurance, title search fees, registration of mortgage, costs for preparing and filing mortgage documents, mortgage broker fees, valuation fees, stamp duty on mortgage and loan establishment fees. There are claimed over a number of years – not all in the year incurred. Borrowing expenses are those costs that are directly related to taking out a loan for the property and include items such as establishment fees, title search fees, any costs incurred in relation to preparing and filing mortgage documents such as broker fees. Borrowing fees can sometimes also include valuation fees and lenders mortgage fees.
It should be noted that any insurance premiums providing for loan payment on your death, as well as interest charges, are not considered borrowing expenses. Additionally, if the total borrowing expenses are less than $100 then the costs are fully deductible in the year in which they are incurred. Similarly, if the loan is repaid in less than five years, the remaining balance of these expenses are fully deductible in the income year in which the loan is finalised.
Council rates are imposed on land owners to help fund the cost of community infrastructure and services to the local municipality. Councils generally offer a one-off annual payment or a payment plan of quarterly instalments, and all payments are tax deductible.
Gardening and lawn mowing
This is deductible and includes dump fees, mower expenses, tree lopping, replacement garden tools, fertilisers, sprays and replacement plants.
Insurance can be purchased to protect your investment properties. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building damage and public liability claims. Mortgage insurance is not immediately claimable but is amortised/ depreciated over time as part of borrowing expenses.
Interest charges on a loan are tax deductible. Principal or capital repayments are not tax deductible. Only the interest component directly related to your property is tax deductible. If you are paying principal and interest on your loan then you will need to calculate the interest component for the year. Locate the bank loan statements for each investment property to ascertain the interest paid for the income year.
Land tax is tax deductible. Land tax is a tax levied on the owners of land and it is based on the value of land. Once you’ve completed a land tax registration form, you will be sent an assessment notice showing the land tax payable on the land you own. You will be liable for land tax if you own, or part-own: vacant land, a holiday home, an investment property, a company title unit, or a retail, commercial or industrial unit.
Legal expenses are generally incurred during the sale or purchase of an investment property. The legal costs for buying and selling a property are not tax deductible and are included in the capital gains tax calculation.
Tax deductible legal expenses include the costs of evicting a non-paying tenant and the costs of terminating a lease.
If you pay for your investment property to be sprayed or fumigated by a professional pest controller, then you will generally be entitled to a tax deduction.
Property agent fees or commissions
A property agent charges fees for maintaining your investment property on your behalf. The property agent lists their monthly charges in the property agent’s summary.
The charges for the year-end financial statement, tenant reference-check fees, leasing fees and monthly rental statement fees are all tax deductible. You will receive the net rental income after the property agent deducts their monthly fee.
Repairs and maintenance
A repair is generally tax deductible. Renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. Renovations, improvements, replacements and extensions are generally deductible over more than one year.
‘Repairing’ is restoring the item to the condition it was in before it deteriorated, without changing its essential character. If you ‘replace’ an item with similar parts/ materials then it is also a repair even though you repaired the entire item. If the item is ‘repaired’ with improved parts/materials, which will improve the function of the item or extend its life then it would be considered as an improvement and need to be included as a new asset.
Initial repair rule:
Repairs undertaken within 12 months of the purchase will not be allowed as a deduction.
These non-allowable deduction details should be kept as they will increase the cost base of the property on disposal and will be needed for capital gains calculations. (Law Shipping Co v IRC (1923) and W Thomas & Co Pty Ltd v FCT)
Repairs at the end of the tenancy
Any painting or cleaning or other repairs to return the property to the condition it was in before it was rented will be allowable.
This is allowable even if the property is reverted to private use as long as the expense is incurred in the year of income.
Keep a record of all your stationery and postage expenses for the year. Don’t dispose of your records. This is an often-overlooked tax deduction by investment property owners.
The cost of obtaining tax advice from a registered tax agent is tax deductible. Tax preparation fees and accounting charges are also tax deductible.
Telephone calls directly related to the running of your investment property are tax deductible.
Travel undertaken to inspect the property or to collect the rent
Investment-related travel and car expenses include airfares, car hire, taxis and accommodation. These expenses are tax deductible if you incur these costs while collecting the rent, inspecting the property, or travelling for some other reason related to your investment property.
In order to claim car expenses, you will need to record your vehicle’s engine size as well as the number of kilometres you travelled while maintaining your investment property each year.
Water rates are tax deductible if you, not your tenant, pay the water bill.
While the previous expenses are the most common deductibles on investment properties, there may be other deductions that you are entitled to specifically relating to your investment property.
What cannot be claimed
Not all fees and costs that are associated with an investment property are able to be claimed as a tax deduction. You are not able to claim a tax deduction for any expenses that are:
- related to the acquisition and disposal costs of the property
- not incurred by you, the property owner, for example, any water or electricity charges that are incurred by your tenants
- not related to the rental and income generation of the property, such as if you personally use your holiday home
Costs such as the purchase cost, conveyancing costs, stamp duty on the property transfer and advertising for sale, which are related to the acquisition or disposal of the property, are not able to be claimed as a deduction. However, in relation to capital gains tax you may be able to add these costs to the property’s cost base, or reduced cost base.
DON’T FORGET TO CLAIM DEPRECIATION
Around tax time, there are even more ways to help you pay off your investment – and one of those is by getting a property depreciation schedule that you can claim on tax.
What is property depreciation?
It’s a dollar amount that the ATO legitimately allows a Tax Payer to claim on items that decline in value as they age.
There are two types of allowances available under the Income Tax Assessment Act 1997: depreciation on plant and equipment (such as blinds, carpets and air conditioners) and depreciation on building allowance, which refers to construction costs of the building itself, such as concrete and brickwork.
How does a depreciation schedule help me?
A depreciation schedule will help you pay less tax now. But remember if you claim the depreciation on a year by year basis when/if you sell the property, the cost base and thus the Capital gain/loss is adjusted by the depreciation claimed. (For instance if you buy a property for $450,000 and depreciate $50,000 of assets before selling for $500,000 your gain is $100,000 not $50,000. Speak to your accountant about capital gain/loss as there are many other factors besides the purchase cost and sale price that make up the cost base.
Is my property too old to claim property depreciation?
The most common misconception is that only new property can be depreciated and this is simply not true. If your residential property was built after July 1985 you’ll be able to claim both building allowance and plant and equipment. If construction on your property commenced prior to this date, you can only claim depreciation on plant and equipment but it may still be worthwhile. A Quantity Surveyor can advise you.
I bought my property three years ago. Can I still make a claim?
Yes you can. Your accountant can amend your previous tax returns up to two years back. However it is important to note that your accountant may determine the tax savings after taking into account their fee for the amendment of the tax return may not be worthwhile. Don’t worry as you do not lose the deduction, as discussed above it will count at the time of sale.
My property is renovated. Can I still claim?
Yes. The Australian Tax Office (ATO) will need to know how much you spent on renovations. If the previous owner completed the renovations you’re still entitled to claim depreciation. Where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation. NOTE: that if you did the renovation yourself, you can not claim for your time.
Shouldn’t my accountant prepare this report?
If your residential property was built after 1985 your accountant isn’t allowed to estimate the construction costs. The ATO has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown. Real estate agents, property managers and valuers aren’t allowed to make this estimate. Your report should be prepared only by a Qualified Quantity Surveyor. Be careful as recent legislation was passed stating that individuals or companies preparing tax depreciation schedules also have to be registered Tax Agents. It is important to get a Qualified Quantity Surveyor to complete the report as a compromise on your tax depreciation schedule will not withstand an ATO audit.
A site inspection of your property is necessary to satisfy ATO requirements and also ensures that all depreciable items are noted and photographed. This guarantees you won’t miss out on any deductions and the documentation can then be used as evidence in the event of an audit.
The best time to get a quantity surveyor to inspect your property is immediately after settlement and hopefully just before the tenant has moved in. But if that’s just not possible, quantity surveyors can liaise directly with the tenant or property manager in order to cause minimal disruption.
Property Investment Strategies – excerpts from article by Bill Zheng in the “Your Investment Property” Magazine