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Tax tips for property investors

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Australians love property, not only to live in, but also as an investment. According to Australian Taxation Office (ATO) figures, around 20% of adult Australians own an investment property.  . 

Investors must declare any rental income earned on investment properties to the ATO, but are also entitled to claim eligible expenses as deductions. Understanding the rules can help you to maximise your deductions.

Is your property eligible? 

It may seem obvious, but to claim expenses, the property must be for income-producing purposes. In practice, this means that the property must be rented or available for rent.

For example: 

Gavin and Lynette own a property in Byron Bay that is rented as a holiday house. They also stay in the property during their annual two-week holiday. Because the house is not available for rent during their holiday, Gavin and Lynette cannot claim the expenses that relate to those two weeks.

If part of your property is used to earn rent, you can claim expenses relating to only that part of the property. 

For example:

Cathy rents out the granny flat attached to her home. This represents 30% of the total floor area of the house. Cathy also shares the laundry with her tenant. The laundry takes up 10% of the total floor area of the house. If half is a reasonable figure for use of the laundry by the tenant, Cathy can claim 35% of the expenses for the property.

30% + (1/2 x 10%) = 35%

Expenses that cannot be claimed as a deduction

These include: 

  • Costs associated with buying or selling a property or getting the property ready to rent. Instead, you may be able to use these costs to reduce a capital gains tax liability if the property is sold.
  • Expenses that you haven’t actually incurred, such as those paid for by the tenants.

Immediately deductible expenses 

Expenses that relate to the management and maintenance of the property can usually be claimed as a deduction in the financial year they were incurred. These may include:

  • advertising for tenants
  • cleaning and gardening
  • council rates
  • insurance
  • loan interest
  • pest control
  • property agent charges
  • repairs, maintenance and servicing costs. 

Expenses that can be claimed over a number of financial years

If you incur borrowing costs, or purchase an asset for the property that cost $300 or more, or undertake capital works on the property, you need to spread the deductions out over a number of financial years. 

For example:

Amanda purchases a $2,000 lounge suite for her fully furnished investment property. The effective life of the item is five years, which equates to a $400 deduction each financial year for the next 10 years. 

Avoiding common mistakes

A common area for confusion is the distinction between repairs and improvements. Owners can claim an immediate deduction for repairs and maintenance, but improvements are considered capital works. 

For example:

When David’s tenants moved out of his rental property, the oven and stovetop needed repair. David decided to replace the entire unit and install new kitchen cabinetry. He also updated the sink and tap fittings, which were not damaged, and installed a more modern extraction fan. These works are an improvement rather than a repair because David did more than just restore the efficient function of the kitchen – he changed the character of the kitchen. David cannot claim the costs of the work on the kitchen as a repair. 

Another trap is using a loan facility for both investing and private purposes.

For example:

Ellen used some of the proceeds of a loan to purchase a rental property (investment) and the rest to purchase a new car (personal). The interest expense on the private portion of the loan is not deductible.

It’s also essential to keep proper records as evidence of deductions claimed.  Setting up a system at the beginning of the financial year can help you with this process, saving you time when you prepare your tax return.

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