Come July 1 the annual tax window opens again. Property investors may have access to a wide range of tax benefits, but tax is a complicated matter. It pays to be across the details. Here’s how you could maximise your return, and what to watch out for.
Over two million Australians own at least one investment property. And that has implications for their income and tax. When it’s time for them to lodge their tax returns, they must declare any income made from those properties – both rental and non rental.
However, many types of expenses from investment properties can be considered as deductions. From reducing your tax bill to negative gearing, it pays to know how the tax regulations could help you.
There are many property-related deductions that can reduce your taxable income. The interest on a mortgage for an investment is tax deductible. So too is mortgage insurance, which is claimable over the term of the loan, or for five years (whichever is shorter).
Investment expenses can be claimed if they are used on parts of the house that are treated as an investment property – and these include:
Fees: Real estate agent fees, secretarial and bookkeeping fees, bank charges on the account used to receive rent and pay expenses, council rates and land tax, building, contents or public liability insurance, credit checks, strata title and owners’ corporation fees, and water supply charges, if the onus is on the landlord to pay for water.
Services: Advertising for tenants, fees for safeguarding title documents, taxation advice, legal expenses to eject a defaulting tenant, depreciation surveys, security patrols and security system monitoring and maintenance, and debt collection for rent arrears.
Property Costs: Repairs to the property, gardening and lawn mowing, pest control, key cutting, servicing hot water heaters, smoke alarms, air conditioning systems and garage door mechanisms, and cleaning at the end of a tenancy, including rubbish removal.
Remember, you can only claim deductions on the property during periods in which it was tenanted or available for rent. You also need to keep records to prove these expenses.
“If expenses related to your investment property exceed the income it brings, then the loss can be deducted from your taxable income including salary and wages.”
As your investment property suffers wear and tear, its value decreases. This depreciation is also tax deductible, at a rate of 2.5% for each year until the property is 40 years old. This is a “non-cash” deduction. It’s distinct from, say, fees, where you are paying out of your pocket and deducting it later. Fittings like lights, fans, sinks, and showers can also depreciate. Qualified building surveyors can advise how much the value of these assets will decrease over time.
Capital Gains Tax
Income from the sale of a property – a capital gain – may attract capital gains tax. The taxable amount is the total sale price less the original purchase price, and any expenses. Expenses include stamp duty, broker fees, loan application fees, legal expenses, auctioneer’s fees and capital improvement outlay. Again, keep a detailed record of those.
In addition, if you bought the property over a year before you sold it, you will only pay 50% of the CGT. Your primary residence is exempt, but you can vacate your primary residence and rent it out in your absence – say, during a temporary overseas posting – for up to six years and the exemption will still apply.
If expenses related to your investment property exceed the income it brings, then the loss can be deducted from your taxable income including salary and wages. This is known as ‘negative gearing’ – and it can apply to any type of investment, not just housing.
What to watch out for
Firstly, in order to claim investment property tax deductions, the property must be a rental. It needs to be tenanted or genuinely made available for rent. It should be liveable, appropriately priced and actively listed. Holiday homes that sit empty for months in between family trips or dilapidated buildings won’t satisfy this test. Keeping records or screenshots of rental website listings can help you establish this.
If you own a property jointly with someone else, or with a group of people, then you must share the rental income and deductions proportionally. For example, a couple owning a house together in equal shares would each claim 50% of the rental income and 50% of the deductions. The owner with the higher taxable income cannot claim more of the share.
Each year at tax time, the ATO announces specific areas it will be investigating. It has been suggested that excessive expense claims and holiday homes could be two of the areas focused on this year.
As with all matters of financial planning, it’s worth talking to an expert about how the tax system can work for you.