- According to an expert, many property investors miss out on thousands of dollars in deductions each year by failing to claim depreciation or by claiming incorrectly.
- Investors can reduce their taxable income through deductions such as negative gearing, loan interest, and depreciation.
- Experts recommend using a quantity surveyor and staying on top of bills, among other strategies, to maximise savings.
For someone juggling multiple rental properties, even understanding what you can legally claim can feel overwhelming. But getting it right matters.
Maximising your investment property tax deductions could put thousands back in your pocket each year and make your portfolio far more profitable.
Mike Mortlock, managing director of MCG Quantity Surveyors, told Savings.com.au property investors could potentially miss out on thousands by not claiming appropriately.
According to Mr Mortlock:
"Of the people that seek us out for a tax depreciation schedule, we found that 6.7% of them left it so long that they missed on average $20,537.
"To clarify here, you can back claim two financial years, so we're talking about people who have missed in excess of those two years.
"Depending on your marginal rate, that could be $6,000 to $8,000 gone from your back pocket. The average depreciation deductions we find for property investors in the first full year of claim is currently $9,249.52."
Hiring a quantity surveyor is a way to ensure you're not paying too much tax.
Key Tax Rules Every Property Investor Should Understand
When it comes to property investment and tax, the main areas of concern are:
- Rental income
- Negative gearing
- The interest portion of loans
- Tax depreciation
- Property management and borrowing fees
- Repairs and maintenance works
Knowing the ins and outs of these aspects in property investing may enable you to find out how to minimise on an investment property and identify what tax mistakes property investors often make.
How rental income is taxed in Australia
According to the Australian Taxation Office (ATO), any rental income earned over a financial year must be included in your assessable taxable income. It's added to your return and taxed alongside other earnings, such as wages or business income.
For example, if you earned $65,000 in salary and $15,000 in rental income (before deductions), your total taxable income would be $80,000. Under the current Stage 3 tax rates, that income level would attract roughly $14,800 in tax before offsets and deductions.
See how rental income is taxed for more info.
How negative gearing reduces tax for investors
Negative gearing refers to the situation where you've borrowed to invest, but the ongoing costs of the investment exceed the income it generates - in other words, you're making a loss.
If you're negatively geared on a property investment, you can deduct these losses from your taxable income. You don't make money from negative gearing; it's simply used to reduce the losses from your investment.
The idea is you wear these losses in the short term and recoup them in the long term when you eventually sell the property.
By contrast, positive gearing means the income from your investment property exceeds the costs, such as interest costs on a loan. The main thing to understand about negative gearing is that its usefulness lies in carrying the loss forward to inevitably make a profit.
Read about negative gearing for more info.
Claiming interest on investment property loans
The ATO allows investors to claim a deduction for interest on a loan used to purchase a rental property, provided the property is either rented out or genuinely available for rent during the income year.
If you begin using the property for private purposes at any point, the interest incurred from that moment on is no longer deductible.
This is an area where many investors slip up. According to Mr Mortlock, a common mistake property investors make is claiming interest on loan redraws that were used for personal spending.
"It's common investors incorrectly claim interest on equity redraws for things like boats, cars, holidays and so on," he said.
"Only the interest portion of the loan on your investment property is claimable, and if you extend the value of the loan with a redraw, investors need to consider where that money is being spent.
"If it's not attributable to income-producing property, you can't claim it as a tax deduction."
Depreciation: What you can and can't claim
A property's depreciation can also offer a tax break. Essentially, the ATO allows investors to deduct the decrease in value of a property's assets, as things age and wear out, from their taxable income, but within certain limits.
There are two main types of depreciation you may be able to claim:
- Capital works deductions - relating to the building's structure and fixed items such as walls, roofs, doors, kitchen cabinetry and bathroom fittings
- Plant and equipment depreciation - covering eligible removable assets like ovens, blinds, carpets, and air conditioners (as long as they are not second-hand equipment that came with the property).
If your investment property was built in the late 1980s or later and you don't know the original construction cost, the ATO allows you to obtain an estimate from a quantity surveyor or other suitably qualified professional. This can help ensure your capital works and depreciation claims are accurate and compliant.
See more about claiming depreciation on property.
Claimable Investment Property Expenses
Property management fees
You can deduct property management fees, provided you paid for them and not the tenant. These include:
- Advertising to find new tenants
- Bank fees and loan charges
- Body corporate fees, cleaning costs, and council rates
- Electricity and gas not paid by the tenant
- Home, contents and landlord insurance
- Legal expenses and land tax
- Property manager fees and commission
- Costs incurred for the inspection or maintenance
Borrowing fees
You can also claim borrowing fees like:
- Loan establishment fees
- Lenders mortgage insurance (if applicable)
- Title search fees
- Mortgage broker fees (if you used one)
- Stamp duty charged on the mortgage
See also: Stamp Duty Calculator
Repairs and maintenance work
Many costs of repairs and maintenance to a rental property are deductible, provided the property is rented or genuinely available for rent and the work isn't an 'initial repair' or an improvement.
What the ATO considers a repair
The ATO defines repairs as working to make good or remedy defects in, damage to, or deterioration of the property. Generally, repairs must relate directly to wear and tear or other damage resulting from renting out the property.
Some examples of repairs include:
- Replacing part of the guttering or windows damaged in a storm
- Fixing part of a fence after a falling tree branch
- Repairing electrical appliances or machinery
These expenses are generally deductible in the year you incur them.
What counts as maintenance
Maintenance covers work done to prevent deterioration or keep the property in usable conditions, such as;
- Painting the property
- Oiling, brushing, or cleaning items that are still in working order
- Maintaining plumbing systems
When the ATO sees the work as an improvement
If the work goes beyond restoring the property and instead enhances it, it may be classified as an improvement, not a repair. An improvement is work that:
- Provides something new
- Extends the property's useful life
- Changes the character of the item replaced
- Replaces an entire asset rather than fixing an existing one
Mr Mortlock said the distinction between repairs, maintenance and improvements is one of the biggest areas of confusion.
"Investors are claiming repairs and maintenance at 100% where these items don't qualify," he said.
"Firstly, the property needs to be rented at the time of the expense. You can't do some work to it while you're living in it, ready for the tenants, and then claim that as an expense.
"Secondly, if you're replacing an asset rather than fixing something already in place, it's most likely going to be a depreciable asset that needs to be written off over its effective life."
Expert Tax Tips for Property Investors
Chartered accountant and director of Box Advisory Services, David Mach, shared with Savings.com.au his top tips for maximising your return:
1. Claim more tax deductions on your property
"If you have commercial or investment properties, get a quantity surveyor to work out a depreciation schedule. Then you'll have a more accurate idea of how much you can claim every year, and save more on tax."
2. Reduce tax through super contributions
"When contributing company earnings to a super fund, the earnings will be taxed at a lower tax rate, effectively reducing the amount of tax you would've had to pay by roughly 12.5%."
3. Get on top of your bills
"Pre-pay your bills to save on tax, such as insurance or rent, before 30 June."
4. Working from home expenses (WFH)
If you work from home, you may be able to claim WFH expenses using either the ATO's fixed-rate method (a set cents-per-hour rate that covers certain running costs) or the actual-cost method.
Since the old 80 cents per-hour 'shortcut' method was only available up to 30 June 2022, and given the stricter record-keeping rules now in place, it's worth getting your accountant to run the numbers on which method gives you the better result.
"Your accountant can help you work out your individual expenses, such as phone costs, internet costs, stationery, the decline in value and repair of capital items, and many more," Mr Mach said.
"By individually assessing how much you can claim, you can potentially claim more through this method instead."
Savings.com.au's two cents
Tax is a complicated beast. That's why professionals like accountants often have to study for four or more years to try and make sense of it.
As a property investor, it can pay to utilise all the tax breaks available to you. But trying to figure out how to maximise your deductions by yourself could be a mistake. Consider speaking to a qualified tax adviser.
Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for investors.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.28% p.a. | $3,075 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 5.95% p.a. | $3,011 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.14% p.a. | 6.16% p.a. | $3,043 | Principal & Interest | Variable | $0 | $350 | 60% |
