How is rental income taxed?

Investing in property is a big deal and is becoming increasingly popular in Australia. According to the Australian Bureau of Statistics (ABS), investor lending hit a new peak of $10.3 billion in December 2021 - surpassing the previous peak in April 2015. Typically investors account for 30% of lending in the market, but investor activity spiked over the past two years, now representing around one third of the value of new housing loan commitments.

Buying an investment property or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for investors.

According to SQM Research, median weekly rents for houses are currently $627, while units median weekly rents are currently $447. So, you could be looking at earning from $23,224 to $32,604 in gross rental income each year.

Just like your regular income, the tax man will come a-calling on your rental income, so you’ll need to be prepared to part with some of it. But a savvy investor will make sure they know what is taxable and what isn’t. And when it comes to investment properties, there are lots of different rules for tax.

Rental income for tax purposes 

According to the Australian Taxation Office (ATO), rental money you receive from renting out a part or all of your property is considered to be assessable taxable income. This means it’s taxed at your marginal tax rate and must be declared in your income tax return. 

The marginal tax rates for 2021-22 below show how much tax you may have to pay on your rental income:

If your annual income before tax is $80,000, and you get $20,000 in rental income a year (before deductions), that brings your total taxable income to $100,000. Assuming no other income or changes, you’d pay $24,497 in tax that year. Other investment returns must also be included in your taxable income, including realised gains and dividends from shares, as well as interest earned from any savings accounts or term deposits. 

Bear in mind this is a very simplistic explanation of how rental income tax works – there’s much more to factor in than just how much income you receive. You also need to factor in deductions.

Looking to compare low-rate, variable investment home loans? Below are a handful of low-rate loans in the market.

Deductions to help save tax on rental income

The ATO states that investment expenses can be claimed as tax deductions as long as they are used on parts of the house that are treated as an investment property. Some of the main types of expenses you can claim include management/maintenance costs, borrowing expenses and depreciation. You cannot claim deductions on things you don’t pay for, like when your tenants pay for improvements or utility bills. 

Management and maintenance costs that can be deducted 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 commissions
• Repairs and maintenance
• Travel and car expenses for rent collection or inspections
• Costs incurred for the inspection or maintenance

Borrowing expenses meanwhile include interest on your investment home loan, but not the principal amount to be repaid. Other borrowing fees include: 

• Loan establishment fees
• Lender’s mortgage insurance (if applicable)
• Title search fees 
• Mortgage broker fees (if you used one) 
• Stamp duty charged on the mortgage 

You can also claim depreciation losses on newly purchased items, such as appliances, blinds & carpets, furniture and water systems. All of these deductions could end up saving you a lot of money on your investment property/properties, so make sure you don’t forget about them. 

The list above is not exhaustive, so check the ATO’s section on investment property deductions for more information. Hiring an accountant can also be worthwhile if you’re struggling to keep track of all your deductions.

Don’t forget about land and property taxes 

Property tax

Also referred to as council rates, property tax funds local government initiatives like rubbish collection and public maintenance (such as mowing and street cleaning). This tax will vary based on the location and value of your property. Speak to your local council to find out the kind of council rates you’ll have to pay. 

Land tax 

Land tax is a tax payable everywhere (excluding the Northern Territory) on the combined unimproved value of the land you own, calculated on what your land would be worth if it was vacant. As you can see from the list of points above, this tax is deductible on investment properties.

Capital gains tax applies to investment properties 

When you sell a capital asset such as shares or property, you make either a capital gain (selling the asset for more than you bought it for) or a capital loss (selling for less than you bought it for). Capital gains tax is the tax incurred on the profit of these investments, with the capital gain being added to your assessable income just as your rental income is. This can dramatically increase your taxable income.

However, a capital gains discount can apply to investors who’ve held their property for more than one year, to discourage people from flipping houses too frequently. This capital gains tax discount is currently 50%, so if you made a profit of $100,000 on the sale of your property, you’d only pay tax on $50,000.

What about negative gearing? 

Yet another tax break you can currently get on investment properties is negative gearing. 

The way negative gearing works is relatively simple – if you’re making a loss on your investment property (your expenses outweigh the income you receive), then you can deduct this loss from your taxable income. Negative gearing is not a money-earning strategy, but rather a loss-reducing strategy. You can use your rental property losses to reduce your taxable income in the short-term, and recoup the losses in the long-term by selling the property, which brings us back to capital gains tax. 

By comparison, a property is positively geared when the rental income received is greater than the expenses of owning the property (mortgage repayments, maintenance on the property, other expenses). 

Read our extensive article on negative gearing for a broader insight as to how it works. One key point to take away is that negative gearing is only useful if you plan to carry that loss forward in order to make a profit on the property in the future. Otherwise, you’re still losing money.

Always keep receipts for rental property expenses 

According to the ATO, records of rental income and deductible expenses need to be kept for five years, which is especially relevant for long-term deductions like asset depreciation. You can’t claim any rental property expenses on your tax return if you can’t prove the claim through a receipt or bank statement, so always keep a record of receipts, either digitally or physically. 

You can use the ATO app or other useful budgeting, saving and tax apps to help with this.

Savings.com.au’s two cents 

Taxation on rental property income and expenses can be quite complicated, so when in doubt, read the ATO’s many pages on the topic or consult the advice of an accountant. As one of, if not THE biggest investments you’ll ever make, you can’t afford to not know what you owe or how much you could save by deducting certain expenses.

Article originally published by Alex Brewster on 17 May 2021, updated by Rachel Horan on 17 March 2022

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