What can you claim on tax when buying an investment property?

Investment properties are a popular way for Australians to build wealth and generate passive income. However, the financial benefits extend beyond rental income and capital growth. Understanding the tax deductions available when purchasing and managing an investment property can significantly reduce your costs and improve your returns. By taking advantage of allowable deductions, you can offset expenses and maximise the profitability of your investment.

This article outlines the key tax deductions available for investment properties in Australia. From upfront purchase costs to ongoing maintenance and professional fees, we’ll explore what you can claim, how to ensure compliance with Australian Tax Office (ATO) regulations, and tips for maximising these benefits.

What Are Tax Deductions for Investment Properties?

Tax deductions allow property investors to reduce their taxable income by claiming eligible expenses incurred during the purchase and management of an investment property. The ATO provides clear guidelines on what can be claimed, distinguishing between immediate deductions and those that must be depreciated over time. Immediate deductions cover costs directly related to generating rental income, while capital expenses are claimed incrementally over several years.

Understanding the difference between these types of deductions is essential for accurate record-keeping and compliance. By identifying which expenses are deductible and keeping detailed records, investors can reduce their overall tax liability and enhance the financial performance of their property portfolio.

Upfront Costs You Can Claim

Some upfront costs associated with purchasing an investment property can be claimed as deductions, although not all are immediately deductible. Loan establishment fees, legal expenses, and costs related to obtaining property inspections or valuations are examples of claimable expenses. Stamp duty, however, is generally not deductible for residential investment properties but can be added to the cost base for calculating capital gains tax (CGT) upon sale.

These initial expenses require careful tracking and categorisation. While some may offer immediate tax benefits, others must be claimed over time. For example, borrowing costs over $100 are deductible across the loan term, ensuring investors can optimise their deductions in the long run.

Loan-Related Deductions

Interest on an investment property loan is one of the most significant tax deductions available to investors. This applies to the portion of the loan used for the investment property, meaning personal use or redraws for non-investment purposes are not deductible. Additionally, ongoing bank charges and fees for refinancing an investment loan can often be claimed.

By carefully managing loan-related expenses and keeping records of all associated fees, investors can maximise this valuable deduction. It’s also important to understand that principal repayments are not tax-deductible, as they represent the return of borrowed capital rather than an expense.

Property Management and Maintenance Deductions

Costs associated with managing and maintaining an investment property are typically tax-deductible. This includes property management fees, advertising for tenants, and leasing expenses. Repairs and maintenance costs, such as fixing plumbing issues or repainting, can also be claimed, provided they are directly related to wear and tear from tenant use.

However, it’s crucial to distinguish between repairs and capital improvements. While repairs are deductible in the year they occur, upgrades or improvements that enhance the property’s value must be depreciated over time. This distinction ensures compliance with ATO regulations and optimises your tax return.

Depreciation Deductions

Depreciation allows investors to claim the decline in value of the building structure and eligible assets, such as fixtures and fittings. For residential properties built after July 1985, depreciation on the building structure can be claimed over a period of 40 years. Items like carpets, appliances, and blinds are also depreciable based on their effective life as determined by the ATO.

Obtaining a professional depreciation schedule prepared by a qualified quantity surveyor is essential for maximising this deduction. The schedule provides a detailed breakdown of claimable amounts, ensuring investors don’t miss out on valuable tax benefits while remaining compliant with tax laws.

Insurance and Utility Deductions

Landlord insurance premiums, which cover rental loss, property damage, and liability risks, are fully tax-deductible. Building insurance and public liability insurance are also claimable if they directly relate to the investment property. These deductions help offset the costs of safeguarding your investment.

Utilities paid by the property owner, such as water or electricity, can be claimed as deductions if they are not covered by tenants. Keeping detailed records of these payments ensures accurate claims and helps investors recover a portion of their operating costs.

Travel and Professional Services Deductions

While travel expenses for property management were largely restricted by the ATO in 2017, investors can still claim other professional services. Fees for accountants, tax advisors, and legal professionals related to the investment property are fully deductible. Costs associated with preparing tax returns or obtaining legal advice for tenancy matters can also be claimed.

Maintaining detailed records of these expenses is critical for substantiating claims. Using professional services not only enhances your tax return but also ensures compliance with complex tax regulations, providing peace of mind.

Capital Gains Tax Implications

Capital gains tax (CGT) applies when you sell an investment property and make a profit. However, investors may qualify for exemptions or reductions, such as the 50% CGT discount for properties held for more than 12 months. Calculating CGT requires a clear understanding of your property’s cost base, which includes purchase price, stamp duty, and improvement costs.

Keeping thorough records of all expenses related to the property is essential for accurate CGT calculations. While CGT is a cost to consider, strategic planning and tax advice can help investors minimise its impact and maximise post-sale returns.

Tips for Maximising Tax Deductions

To make the most of tax deductions, maintaining organised records of all expenses is essential. Keep receipts, invoices, and financial statements related to the property for at least five years, as required by the ATO. Using property management software or consulting an accountant can streamline this process and ensure nothing is missed.

Seeking professional advice is highly recommended, especially for first-time investors or those with complex portfolios. Tax advisors can help identify additional deductions, ensure compliance with tax laws, and optimise your financial strategy. By staying proactive and informed, you can leverage tax benefits to enhance your investment’s profitability.

Conclusion

Buying an investment property in Australia comes with a range of tax benefits that can significantly reduce costs and boost returns. From loan interest and maintenance expenses to depreciation and professional services, understanding what you can claim is key to maximising your financial advantages.

By keeping detailed records, distinguishing between deductible and non-deductible expenses, and seeking expert advice, you can navigate the complexities of property tax and make informed decisions. Leveraging these benefits effectively ensures your investment property contributes to long-term wealth and financial security.

If you are looking to purchase your investment property, speak to an experienced buyers agent by filling out the form below. They can help you find the best property for your needs, and negotiate the lowest purchase price, saving you money as well as time. If you need a home loan for your investment property, or to use equity from your existing property, speak to an expert from Eden Emerald Mortgages.