Where there is income of any sorts there comes tax liabilities for sure. Hence, prior to your investment, when you prepare a strategy you shall understand all kinds of taxes and deductions that may be levied on your investment property. Investors can claim deductions only on their property during tenanted periods and for that portion of expenses used and recorded for business purposes. But at the same time property investment also plays a good part in saving the taxes. So what are the criterias that you must take into consideration in regards to your Investment Property Taxation?
- Rental income
- Legal expenses
- Repairs and Maintenance Costs
- Depreciation of all kinds
- Property managers and Agents Costs
- Loan related Costs and interest
- Travel and Accommodation Costs limited to Property Acquisition
- Accounting Costs and Holding costs
- Negative Gearing
- Capital Gains Tax (CGT) Deduction
Note: We also understand that this is for the general information and awareness article for the aspirant investors. By no means it shall be considered as highly professional advice or absolute. This list is prepared on the basis of our research. You must turn to a professional to understand the concepts better and clearly.
Property Investment may seem really expensive but if you know the right strategies and techniques, you may be able to recover a major part of your investment in Tax deductions. Let’s understand How you can minimise taxes on your investment property by keeping the above concepts in mind:
- Rental Income:
- According to the Australian Taxation Office, the rental income is taxed at your Marginal Tax Rate and must be declared in your income tax return.
- Rental income is taxed in direct proportion as shown in the ownership title.
- To adjust your tax against rental income, you shall disclose all the expenses incurred to obtain the rental income such as advertisement cost, cleaning, gardening, body corporate fees, pest control, water rates, council rates etc.
- Bills like gas and electricity not paid by tenants can also be claimed against tax deduction.
- The rents received shall be at the market acceptable rates as the tax will be deducted at the same cost. Lower charged rates will result in lower deductions so, stay updated with the market and keep rolling your rents instead of stagnating them.
- Legal Expenses:
Legal expenses also work as a deduction in tax. This may include any type of legal costs settled in regards to renting or evicting the tenants, rental agreements or any other necessary documents and unpaid rents by the tenant if taken to court. Investors are allowed to record any necessary expenses incurred to gain their income. If in case the required expenses are higher than the actual assessable income, then one can set that off in tax deduction as well.
- Repairs and Maintenance Costs:
ATO describes Repairs as the cost incurred on making better the defects, damage and deterioration of the property which is directly related to wear and tear of the property. Whereas Maintenance here refers to preventing the same things from happening.
Repairs can be the costs incurred on replacing parts of electrical appliances, broken roofs, broken windows or doors, fencing etc which may have been damaged due to any natural cause.
Maintenance includes regular expenses used to keep the property well running such as the plumbing, gardening, oiling, painting, cleaning etc.
These kinds of expenses can be claimed back in tax deductions under repairs and maintenance expenses.
But remember that any items newly purchased or installed in the property to upgrade it will never come under this head. According to ATO it is described as Improvements even if it is to make the property rent worthy. Those costs will come under Capital Works Deduction.
- Depreciation of all kinds:
ATO allows investors a tax break in the form of depreciation deductions. ATO believes that eventually property passes through all kinds of wear and tear which leads to reduction in its valuation.
Depreciation in terms of a property can be of many kinds such as Tax depreciation, Depreciation of Building, Depreciation of fittings, Plant Equipment and Appliances Depreciation, etc.
If you are investing in a property constructed post 1985, you will be eligible for deduction of building depreciation and even on renovation but it shall be reasonable. Depreciation costs make a really good impact in order to make it a tax saving property investment. The building shall be calculated at depreciated cost and it can be claimed under non-cash deductions under ITR.
Depreciation of fittings play by the same rules as depreciation of buildings. Only difference is that it is strictly limited to the fittings inside of the investment property such as lights, power sockets, windows, fan, kitchen cabinets, showers, etc.
Appliance depreciation as the name suggests can be availed on the appliances such as oven, washing machine, refrigerator, dishwasher, mixer-grinders, stove etc. These appliances are generally depreciable over 5 years.
Depreciation here will be written off at 2.5% on the original value of the building for 40 years from the construction date of the building.
Best way to assess and calculate the depreciable amount is to assign a quantity surveyor who will prepare a solid depreciation schedule for you.
- Property Managers and Agents Costs:
It is always a wise decision to hire property managers to manage your entire property needs such as tenant acquisition, eviction, inspection of the property and other things.
Property managers lessen your burden and worries thereby allowing you to focus on your main work of next strategy formulation etc.
Another benefit of hiring Property managers is that this cost is also deductible in Tax.
- Loan related Costs and interest:
ATO suggests that if Loan is obtained for acquisition of rental property then interest of loan or a portion of it is subject to deduction in taxation.
One shall not forget that it is only for income producing property, if it is used for personal use then you may lose the said deduction.
Apart from interest the other borrowing costs are also claimable in taxation such as:
- Stamp duty on mortgage.
- Mortgage broker fee if applicable.
- Fee incurred on valuation of loan.
- Title search fee.
- Loan establishment fee.
- Lender’s mortgage insurance.
7. Travel and Accommodation Costs limited to Property Acquisition:
- An Investor can also claim the travelling cost incurred while acquiring the rental property. By saying so, we do not mean that the entire travelling and accommodation cost will be chipped off. You need to be reasonable here as it is strictly restricted to business related purposes.
- For instance, you stay in a state situated away from your investment property location, let’s assume your residence in Brisbane and your rental property in Victoria. In this case, ATO allows you travel allowance of flight from and back to your place and one night’s stay, carried only for the purpose of your property inspection.
8. Accounting Costs and Holding Costs:
- Many people do not realize this but a great accountant can help you get maximum tax saved, not just by preparing good statements and advising you more ways to reduce your tax liabilities but their fee is actually deducted from Tax.
- This claimable fee includes preparation of your accounting statements and lodging the tax return, legal advice fee, sometimes if you are seeking advice from a highly professional tax advisor then the cost of traveling for this purpose may also be deducted in your taxes.
- These deductions are only available on business related services and by no means shall be used for personal use.
- Holding costs are related to that property which is yet to be built or you can say under construction property. When a property is bought on a yet to be built on land then the costs include interest on the loan and interests payable in parts as the property gets built up.
- Holding costs play a major role in tax deductions as well and a lot of investors those with less expert advice or knowledge cease to understand this concept.
- If you hire a good accountant he will acknowledge and help you with all the possible cost exemption and if it is worked in the right way you may realize that your investment property can cost you way less after tax deductions.
9. Negative Gearing:
Negative Gearing means to hold on to a property that allows you less income compared to your borrowings and expenses thereby making it a loss making asset.
Negative Gearing is generally used to reduce the tax liabilities. By this concept in the short run or initial years you do not really earn anything but as mentioned before, if your expenses exceed the actual assessable income, it can be adjusted against taxes thereby allowing you to pay less taxes.
We agree that it may sound a little strange to make a loss on one hand to save taxes on the other hand but it is a short-term phenomena, eventually when you sell the property, you will definitely earn more over a long period. This is the very reason for the popularity of the Negative Gearing idea.
10. Capital Gains Tax (CGT) Deduction:
Capital Gains is simply the profit earned on the sale of your property.
Now the Big Move here is to sell your property after holding it for a few months above a year (If you are planning to sell it off in a short time, else holding property for a long term is a better choice). By doing so you will save 50% of your Capital gains.
As per ATO, the taxable capital Gains payable on properties sold after a year is half, thereby saving your pocket thousands of dollars.
SUMMARY
- Most important thing to keep in mind is that all these expenses are only deductible or claimable for the period when the property is set on rent. Only a few pre expenses are allowed to be deducted which has been mentioned already.
- Keep record of and claim all the possible expenses that you have incurred on your rental property investment from advertisement for tenant acquisition to council costs or any other expenses.
- Do not forget to keep the receipts of every claimable expenses as they act as proof. These receipts should be accurate.
- Hire great property managers to help you in easy management of property and to cut off some tax liabilities as well.
- Get the best Quantity Surveyor to help you analyze the right depreciable amount of the property and to craft an excellent depreciation schedule as it constitutes a major part in tax deductions.
- Keep in mind the difference between repairs, maintenance and improvements as they are deducted under different heading and some are not even claimable.
- We suggested you negative gearing here but always remember property investment shall be made on your affordability so do not Negative Gear if it can become non-affordable in near future as we do not want to exhaust all your income thereby leaving you restless.
- Do not forget about the Capital Gain tip, it can be a huge help later.
Alright! We hope this article was helpful for you to understand the overall purview and crux of taxation and how you can save more than just a little on your investment property. We are eager to know from your experience in property as to how much extent the above tips were helpful to you if you followed them before so, drop the comments below and help other readers with your experience.
