Advice Market Blog
I’ve Recently Invested in a rental property – What expenses can I claim against it?
July 28, 2016
If you plan on building a sizeable investment portfolio then it’s likely that property will be a big part of your investment mix. Australians have long held a penchant for bricks and mortar investing – according to a recent survey in the Australian Financial Review the average wealthy Australian holds as much as 30% of their investment portfolio in property, considerably higher than the comparable mix for overseas investors.
Smart property investing isn’t just about maximising capital gains and rental returns. In order to get the best return from your property portfolio you need to take advantage of all the tax deductions that are available as a property investor.
Tax deductions can be a complex area and it always pays to get the advice of an expert who can help you plan your taxes to take full advantage of the tax deductions on offer. A rule of thumb to remember is the purpose behind the expense. If the cost has been accrued in the process of earning your rental income then it is likely to be tax deductible – if it isn’t it won’t be.
This area can cause confusion for some investors who assume any borrowings against their investment property will automatically be deductible. The security offered is not the factor that decides the deductibility but what you intend to do with the funds. If you have borrowed money against your investment property with the purpose of going on holiday then it won’t be tax deductible. If you borrow to make repairs then it would be. Good tax advice can help you release borrowed funds in a legitimate and tax deductible manner that can then be used for personal purposes and it pays to get expert advice in this area before going ahead. How you structure your debt is as crucial as how you use it.
So what are examples of tax deductible expenses for a rental property? The ATO (Australian Tax Office) carry examples on their website at https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Investments,-including-rental-properties/Rental-property-expenses/
Among the main expenses that can be claimed are repairs, body corporate expenses, advertising for new tenants, bank charges, cleaning fees, legal expenses relating to the properties rental (e.g. rental contracts), pest control, agency management fees, rates and insurances to name a few. As the above examples show all of these are related to the process of earning the rental income and are part of the cost of providing a functioning home for a tenant.
If the property is 100% rental then a claim of 100% of the costs can be made however if you are renting part of a property (e.g. a room, a sleep out, or a property in which you also live) then only a percentage can be deducted.\
Mortgage interest and ongoing costs represent one of the largest expenses that a landlord will occur and this is an area that care needs to be taken with. The bank charges related to interest and fees will generally be fully deductible however some costs related to establishing the loan may not be. For example legal costs related to purchasing the property may not be deductible and generally neither will be the legal costs related to establishing your mortgage. Again an experienced tax advisor will advise you on this.
One of the most confusing areas for many investors, and one of the biggest tax deductions lies in the area of depreciation. Depreciation represents the effective write down in the value of an asset over its useful life. Although this seems to go again the concept of property rising in value it should be remembered that it is generally the value of the land that increases over time and not the value of the house that sits on the property. To reflect this you can claim a deduction for the reduction in the value of the bricks and mortar on the property however bear in mind that this may be repayable as depreciation recovered if the value of the property does rise which is often the case.
The area of tax deductions for rental properties can be complex and this article doesn’t, in any way, represent tax advice. It’s important you talk to a tax expert in order to avoid falling foul of the ATO and to ensure you maximise the tax deductions you are entitled to.
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The information provided is intended as a guide only and does not take into consideration your personal situation, needs and objectives and should not be considered as advice of any nature.