Investment Property Expenses You Can Claim for Tax Deductions

23 Aug, 2023 By: Lotus Smart

If you’re worried that purchasing and maintaining your investment property will empty your coffers, then we have some good news for you: Tax Deductions! Here’s a list of investment property expenses that you can claim for tax deductions this financial year:

Advertising for tenants

To attract tenants to your investment property like moths to a flame, you’ll need to run some advertisements. You might consider this additional expense on your investment property to be a hassle, but this is a claimable expense if it is strictly advertising for tenants and your property is available for rent. These costs include advertising with local real estate agencies, and posting advertisements in newspapers, local publications, or online. However, advertising for the sale of an investment property is a capital expense and can only be taken into consideration as part of the cost based on the property on disposal.

Bank charges

The bank charges on your loan account (usually in the form of monthly fees) as well as any bank charges on a separate bank account that you have specifically set up for your investment property are tax deductible.

Borrowing expenses

Borrowing expenses are costs associated with the borrowing of money required to purchase an investment property. These include:

Lenders’ mortgage insurance
Title search fees
Registration of mortgage
Costs for preparing and filing mortgage documents
Mortgage broker fees
Valuation fees
Stamp duty on mortgage
Loan establishment fees
Establishment fees
Lender’s mortgage fees.

Although not deductible upfront, these costs on your investment property are deductible over the shorter of either the period of the loan or five years. These expenses are claimed over a number of years – not all in the year incurred.

Remember that any insurance premiums and interest charges provided for loan payment on your death are not considered borrowing expenses. Additionally, if the total borrowing expenses are less than $100, then the costs are fully deductible in the year in which they are incurred. Similarly, if the loan is repaid in less than five years, the remaining balance of these expenses is fully deductible in the income year in which the loan is finalized.

Council rates

Council rates are imposed on land owners of investment property to help fund the cost of community infrastructure and services to the local municipality. Councils generally offer a one-off annual payment or a payment plan of quarterly installments, and all payments are tax deductible.

Gardening and lawn mowing

This investment property cost is deductible and includes dump fees, mower expenses, tree lopping, replacement garden tools, fertilizers, sprays, and replacement plants.

Insurance

Insurances, such as landlord insurance or home insurance can be purchased to protect your investment property. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building damage, and public liability claims. Mortgage insurance is not immediately claimable but is amortized or depreciated over time as part of the borrowing expenses of the investment property.

Interest expenses

Interest charges on a loan – the ones directly related to your investment property – are tax deductible. The principal or capital repayments are not tax deductible. If you are calculating principal and interest on your loan, then you will need to locate the bank loan statements for each investment property to ascertain the interest paid for the income year.

Land tax

Land tax is levied on the land owners, is based on the value of land, and is equally deductible. Once you’ve completed a land tax registration form, you will be sent an assessment notice showing the land tax payable on the land you own. You will be liable for land tax if you own, or part-own, including vacant land, a holiday home, an investment property, a company title unit, or a retail, commercial, or industrial unit.

Legal expenses

Legal expenses are generally incurred during the sale or purchase of an investment property. The legal costs for buying and selling a property are not tax deductible and are included in the capital gains tax calculation. This includes the costs of evicting a non-paying tenant and the costs of terminating a lease.

Pest control

If you pay for your investment property to be sprayed or fumigated by a professional pest controller, then you will generally be entitled to a tax deduction.

Property agent fees or commissions

A property agent charges fees for maintaining your investment property on your behalf. They list their monthly charges in the property agent’s summary. This includes the year-end financial statement, tenant reference-check fees, leasing fees, and monthly rental statement fees – which are all tax deductible. You will receive the net rental income after the property agent deducts their monthly fee.

Repairs and maintenance

A repair on an investment property is generally tax deductible since renovations, improvements, replacements, and extensions are treated differently and are generally deductible over more than one year.

Initial repair rule:

Repairs undertaken on your investment property within 12 months of the purchase will not be allowed as a deduction. These non-allowable deduction details should be kept as they will increase the cost base of the property on disposal and will be needed for capital gains calculations.

Repairs at the end of the tenancy:

Any painting or cleaning or other repairs to return the investment property to its initial condition before it was rented will be allowable, even if the property is reverted to private use as long as the expense is incurred in the year of income.

Stationery

Often overlooked tax deductions by investment property owners, keep a record of all your stationery and postage expenses for the year – don’t dispose of them.

Tax-related expenses

The cost of obtaining tax advice including tax preparation fees and accounting charges from a registered tax agent is tax deductible.

Telephone expenses

Telephone calls directly related to the operation of your investment property are tax deductible.

Water charges

Water rates are tax deductible if you, not your tenant, pay the water bill of your investment property.

WHAT CAN NOT BE CLAIMED

Not all fees and costs that are associated with an investment property are able to be claimed as a tax deduction. You are not able to claim a tax deduction for any expenses that are:

related to the acquisition and disposal costs of the property
not incurred by you, the property owner, for example, any water or electricity charges that are incurred by your tenants
not related to the rental and income generation of the property, such as if you personally use your holiday home
costs such as the purchase cost, conveyancing costs, stamp duty on the property transfer, and advertising for sale, which is related to the acquisition or disposal of the investment property
costs including the preparation of the investment property for new tenants (except for the first tenants)
inspecting the property for the duration or at the end of the tenancy
undertaking repairs including the repairs done as a result of damage or wear and tear incurred while renting out the investment property
maintaining the property while it is rented or genuinely available for rent
collecting the rent
visiting your agent to discuss your investment property

However, in relation to capital gains tax, you may be able to add these costs to the property’s cost base or reduce the cost base. On a side note, you can claim a deduction for the cost of hiring other parties/agents to carry out tasks on your behalf. For instance, appoint Real Estate Agents for managing your investment property through inspections, repairs, sales, etc.

In a keynote, a new regulation was introduced in July 2017, which states that travel expenses regarding your investment property can no longer be claimed. Additionally, if you are an excluded class of entity or have a business for the purpose of gaining or producing assessable income, you are exempt from the new rules.

Curious as to what this means? The ATO defines an ‘excluded class of entity as:

a corporate tax entity
a superannuation plan that is not a self-managed superannuation fund
a public unit trust
a managed investment trust
a unit trust or a partnership, members of which are entities of the type listed above

DON’T FORGET TO CLAIM DEPRECIATION

Around tax time, there are even more ways to help you pay off your investment – and one of those is by getting a property depreciation schedule that you can claim on tax.

What is property depreciation?

It’s a dollar amount that the ATO legitimately allows a taxpayer to claim on items that decline in value as they age. There are two types of allowances available under the Income Tax Assessment Act 1997: depreciation on plant and equipment (such as blinds, carpets, and air conditioners) and depreciation on building allowance, which refers to the construction costs of the building itself.

How does a depreciation schedule help me?

A depreciation schedule of your investment property will help you pay less tax now. But remember, if you claim the depreciation on a year-by-year basis when/if you sell the property, the cost base and the capital gain/loss are adjusted by the depreciation claimed. Speak to your accountant for a better understanding of capital gain/loss.

Is my investment property too old to claim property depreciation?

The most common misconception is that only new investment property can be depreciated and this is simply not true. If your residential property was built after July 1985, you’ll be able to claim both building allowance and plant and equipment. If construction on your investment property commenced prior to this date, you can only claim depreciation on plant and equipment but it may still be worthwhile. A Quantity Surveyor can advise you.

I bought my investment property three years ago. Can I still make a claim?

Yes, you can. Your accountant can amend your previous tax returns up to two years back. However, it is important to note that your accountant may determine the tax savings after taking into account that their fee for the amendment of the tax return may not be worthwhile. Don’t worry, you won’t lose the deduction, as discussed above, it will count at the time of sale.

My investment property is renovated. Can I still claim?

Yes. The Australian Tax Office (ATO) will need to know how much you spent on renovations of your investment property. If the previous owner completed the renovations, you’re still entitled to claim depreciation. Where the cost of renovation is unknown, a quantity surveyor has been identified by the ATO as appropriately qualified to make that estimation. Note that if you did the renovation yourself, you can not claim your time.

Shouldn’t my accountant prepare this report?

If your residential investment property was built after 1985, your accountant isn’t allowed to estimate the construction costs. The ATO has identified quantity surveyors as properly qualified to make the appropriate estimate of the construction costs, where those costs are unknown. Real estate agents, property managers, and valuers aren’t allowed to make this estimate. Your report should be prepared only by a Qualified Quantity Surveyor. Be careful as recent legislation was passed stating that individuals or companies preparing tax depreciation schedules also have to be registered Tax Agents. It is important to get a Qualified Quantity Surveyor to complete the report since a compromise on your tax depreciation schedule will not withstand an ATO audit.

A site inspection of your investment property is necessary to satisfy ATO requirements and also ensure that all depreciable items are noted and photographed. This guarantees that you won’t miss out on any deductions and the documentation can then be used as evidence in the event of an audit.

The best time to get a quantity surveyor to inspect your investment property is immediately after settlement and hopefully, just before the tenant has moved in. But if that’s just not possible, quantity surveyors can liaise directly with the tenant or property manager in order to cause minimal disruption.

Conclusion

This information is general in nature and does not take into account personal circumstances and situations. For a better understanding of the ins and outs of taxes on your investment property, we, at Lotus Smart, have a dedicated team of proactive, forward-thinking, result-oriented members who have held roles in corporate accounting across Australia and overseas. With over 20 years of experience, we’ll ensure that you’re always getting the best guidance from the most professional company in the industry. Lotus Smart are expert Property Accountant in Melbourne, committed to providing high-quality and professional services to our clients. Whether you are a property developer, a structural engineering firm, an architect, or a construction company, Lotus Smart can help you!

For more information, contact us.