Tax season can be a stressful time for property investors. But knowing exactly what you can and can't claim will save you a lot of trouble and maximise your tax savings.
Michael, a property investor took out a loan to buy his first property. But he used part of the loan for a personal purchase.
To be precise, he bought himself a car. And he thought that this wasn’t much of a big deal; he will pay back the loan at the bank anyway.
So, during tax season, Michael tried to make a claim for the expenses he incurred from his property loan.
This was when he ran into some trouble with the Australian Taxation Office (ATO). It turns out that personal expenses made using loan budgets can’t be claimed.
Unfortunately, this is a common mistake that many property investors make.
To avoid this, it’s important for you to know what deductions you can and can’t claim from your property tax.
And this article will take you through all of these.
What you can’t claim
Before getting into what you can claim from their tax deductions, let’s first outline what you can’t claim:
1. Personal expenses related to the property
Like in Michael’s case, personal expenses taken from a budget allocated for your property investment are non-claimable.
This is also true when you are the owner-occupant of a property since this technically means that you are using that property for personal use (you’re living in it).
For investment properties, you also cannot claim expenses incurred by relatives or close friends who used those properties. For instance, if they used your property to hold a meeting or gathering, these are still considered personal expenses.
2. Expenses paid by tenants
When you rent or lease your investment property, you can’t make claims for the expenses paid for by your tenants. These expenses include utility bills like water and electricity and any furnishings the tenants bought themselves during the rental term.
3. Borrowing costs
These are the expenses that you directly incur when taking out a loan for purchasing your investment property.
The following are included in your borrowing costs, which are non-claimable:
- Loan balances for the property
- Legal expenses (an example would be your solicitor’s fees)
- Insurance premiums
- Interest expenses
- Stamp duty charged by your state
4. Acquisition and disposal costs of the property
Amounts incurred in acquiring your property investment are also non-claimable. These consist of:
- The purchase price of the property
- Conveyancing fees
- Property inspection fees
- Repairs and renovations immediately after purchase
- Travel expenses to inspect your rental property
FIRB approval fees are also part of the purchase costs. These are applicable particularly to foreign property investors with no Australian visa.
5. Some depreciating assets
Although you can generally make claims for depreciation, there are certain assets that are excluded. Namely any second-hand depreciation plant and equipment item such as carpet, blind and white goods, etc.
Deductions you can claim
Now that you have a clearer idea of what you can’t claim from your investment property tax, here are the ones that you can claim.
1. Loan interests
The interest that you pay in addition to your investment mortgage is always tax-deductible. In fact, this is a large tax saving that is easy to claim. Plus, you can also claim associated fees for things like home loan maintenance.
But you need to make sure that all the money borrowed was used in purchasing the property. Any expense not related to the property is excluded.
Also, the loan must be applied to acquire an income-producing asset, not a home that you will use personally.
2. Repairs and maintenance
Repairs are used to restore damaged items in your property to their original condition. But you need to use similar materials as the items for the costs to be deductible.
Maintenance refers to work done to keep the property in a liveable state for renters. Plumbing work is an example of maintenance.
These are different from property improvements, which you cannot claim as an outright deduction.
The money you spend to advertise your property and find tenants is also claimable. Photography fees and printing costs for brochures are part of this.
Advertising costs also include any money used to create real estate listings online.
The different kinds of insurance attached to your investment property usually consist of:
- Building insurance
- Home and contents insurance
- Public liability
You can make tax claims for all of these if you are the person insured. But if the contents insurance is paid for by your tenants or renters, this is non-claimable.
As you know, the assets and structures in your investment property will reduce in value down the line. You can claim deductions for their depreciation if they are brand new.
Some examples of depreciating assets in your investment property are:
- White goods appliances
- Timber flooring
A good thing to remember is that there are expenses you can claim right away. These include costs for repairs and maintenance, as well as interest expenses.
Some expenses on the other hand can be claimed over a period of several years. Depreciating assets fall into this category as do capital work deductions.
Know your tax deductibles
As a property investor, you can save a lot through your tax deductions.
But you first need to make sure that the costs you claim are applicable as set by the ATO. After all, some expenses may seem deductible but actually aren’t. And knowing which are non-claimable can help you better manage your property taxes.
Now, an example of a claimable expense is depreciation.
Washington Brown can assist you in assessing your depreciation costs, as well as preparing your tax depreciation schedule so you can file your claims faster.
Tyron Hyde is the CEO of Washington Brown and is considered one of Australia’s leading experts in property tax depreciation. He is also a registered tax agent. Washington Brown manages construction costs worth over $2 billion and completes 10,000 schedules annually. For a depreciation schedule quote CLICK HERE and follow the 3 simple steps or estimate your depreciation cost.
The Washington Brown Free Depreciation Calculator will give you an estimate of the depreciation deductions you could claim on your investment property.
Read more Expert Advice articles by Tyron
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.