When you seek financial independence, real estate investment is an attractive proposition, which is true, especially in terms of tax incentives or advantages.
In other words, landlords have various ways to reduce their annual taxes and fees, and these cutbacks or deductions are often the results of the difference between negative and positive cash flows.
One important thing that investors should take note of when claiming rental property tax deductions is that they are only eligible for periods of which the property gets rented or legitimately accessible for lease. Additionally, the claim includes only the portion of the money spent or cost used for business purposes, and they should have tangible records to prove.
Taking that into account, here is the list of the top tax deduction cases or considerations for real estate investments.
- Open Plan or Open Concept Lounge
Picture: Alberto Castillo Q
Real estate investments require hard labour. However, everything becomes a bit easier than it usually does with the enormous tax breaks or cuts. The following lists are suitable instances for an investment property tax deductions example.
- Advertising costs of rental
Rule of the thumb, landlords should need to find lessees or have new tenants to occupy their properties using wide-ranging advertising campaigns.
When a landlord markets their property through brochures, online, print media, and signs, he or she can claim the advertising or costs up against their income within the year they paid for such expenses.
- Interest Charged from a Property Loan
Investors can also claim the interest charged and any bank fees from a property loan.
Say, for example, if an investor gets charged with $20,000 interest and $200 fees from a property loan, he or she can claim these personal tax returns. However, the principal sum repayments are unclaimable. This rule also applies to the interest of the entire loan size when an investor roll-over or refinance a portion of the loan for personal reasons, irrespective if equity of the property investments got used as a security in that loan.
- Council Rates for Property Tax
Australia’s property tax system includes council rates, which can get deducted within the year they got paid, taking note that the claim covers only the periods the property got rented.
For instance, when a tenant occupies a rental property within a 180-day timeframe, claim covers for council rates within that period. That said, he or she can only claim 49.3%, which is the percentage result of dividing 180 days of occupancy to 365 days of the year of the total amount paid in property tax council rates.
- Lounge Room
Picture: Chastity Cortijo
As mentioned earlier, property investors can get to claim the interest of their loan repayments but not the payment they made for the principal sum of their loan.
- Tax for a Land Property
Any real estate investor can use the land tax for rental property deductions ATO (Australian Taxation Office), as long as they have a rental or leasing property.
Yet, the levy or tax is significantly different from each state and so, is the timing of claims. It is best to consult a legitimate tax advisor or the respective department of the state government to make sure that you get to claim the correct amount for the year.
- Fees or Levies for a Strata Title
Owners of horizontal subdivisions and multi-level apartment blocks usually acquire a strata title. Any property investor with such title can claim the cost they paid for the body corporate fees, which are the charges levied when you have duplexes, apartments, multi-level lots, and townhouses, among others.
Nevertheless, investors can’t claim the cost for maintenance and garden expenses separately once they got added or included in the strata fees.
- Depreciation of the Building
Investors can also claim for deductions on the depreciation rates of their buildings and renovations made for their properties.
When you have a property built on the 16th of September in 1987, you can’t claim the depreciation value on the original building construction expenses. However, if the building date is later than that date, the owner gets to claim a depreciation deduction. That said, owners can get 2.5% every year of the cost for four decades or 40 years.
So, when the owner had his or her building constructed in 1990 for $100, 000, he or she can claim $2,500 of depreciation deduction each year up until 2030.
You can use the investment property tax deductions calculator to help you with your claim deductions.
In the same way, building owners can’t claim the deductions on depreciation for renovations that happened before the 27th of February in 1992. Nonetheless, if the building date is after the latter mentioned, investors can claim the depreciation deduction, which is the same rate and duration stated above.
Although again, deductions claim includes the time only when the property has occupancy or a tenant.
- Depreciation of Installed Appliances
Another depreciation deduction that a property owner can consider is the fall in the value of the installed appliances, such as air conditioners, dishwashers, stoves, washing machines, and other facilities or assets in the rental residences.
Similar to the building rate, these installed appliances also decrease in value. With that said, landlords or owners can claim the depreciation amount for over a few years, which is usually according to each of the asset or appliance’s “effective life.”
Nonetheless, landlords need to meet or pass specific criteria to claim deduction on the depreciation of installed appliances.
Residential rental owners can only claim the deductions of the depreciation value of installed appliances for both brand-new and hand-me-down or second-hand assets if they bought the property on the 9th of May in 2017 at 7:30 pm and placed the equipment before the first of July 2017.
If this is not the case, only the depreciation amount of the brand-new installed appliance can get deducted or when no one made earlier claims of the depreciation deductions because the property is either new or recently has a massive renovation.
- Wear and Tear Repairs and Maintenance
When you spent an amount of money on repairs and maintenance due to wear and tear, you can claim immediate tax deductions for it. By saying so, when you need to replace several tiles of your broken roof after a storm struck or repair a defective appliance, you can file a claim as an immediate deduction for the costs of hiring a licensed expert to do the job for you.
Nevertheless, a depreciation cost deduction should get claimed when there’s an appliance replacement, which is relevant to its lifespan or “effective life.”
It is also the same when you replaced your old fence or installed new carpets to increase the property value. You will need to claim the costs of old fence replacements and replace carpet rental property tax deduction as a capital work deduction, which is at 2.5% of the total cost per year for forty (40) years.
- Pest Control Servicing
Whoever pays the pest control servicing, it could either be the renter or the owner, can get to claim the immediate deduction of the cost of acquiring the professional service of a pest controller.
- Open Plan Dining Room
Picture: Douglas Sheppard
Major renovations are not immediate or one-time deduction claim but a capital work deduction claim that will get covered for forty years
- Improvements or Replacements for Garden and Maintenance
Real estate owners can claim the preservation and replacement costs of plants and garden structures as an immediate structure. New plants or changes, which add extra value to the property and considered as “improvements,” should follow the depreciation deduction appropriately.
- Rental Property Insurance
You can also claim the deduction of the cost of your rental property insurance. You can refer to your statement per quarter, or you can request your provider for the annual breakdown for the amount.
- Pertinent Bookkeeping Services
Numbers involved in dealing with property or real estate investments are enormous and can become confusing. Hence, landlords or owners would require to hire an accountant.
A landlord or property owner can claim the costs of the services paid for the advice, tax return preparations, and rental account management expenses within the year the costs incurred.
Be informed, though, that the owner cannot claim deductions of their personal tax return preparation costs towards their rental property. You can, however, submit it as a write-off or erasure when you work on your income tax statement for the year.
- Fees for the Agents
Commission or fees paid for agents who are in charge of finding tenants, collecting the rent, and maintaining your rental property are tax-deductible.
- Electricity, Internet, Phone, and Stationery Services Costs
Rental properties are the same for any kind of business operations, and that is why, the Australian Taxation Office (ATO) allows landlords to claim deductions of the costs of electricity, internet, phone, and stationery services, used in the rental property they owned.
Also, be reminded that when the deduction claim is higher than the usual average for property owners or investors, it will possibly raise suspicion to the ATO.
- Bedroom Dresser
Picture: Hutomo Abrianto
- Costs of Travel
Mum-and-dad property investors will no more be able to claim for the costs of their travel expenses in inspecting or checking their rental property and performing repairs, among others.
Rule exceptions include property owners carrying real estate investment businesses and excluded entities.
So, when a particular person owns quite a few rental real estate properties through his or her “Self-Managed Super Fund (SMSF),” which regularly makes him or her travel to the rental homes or residences he or she owned to perform repairs and garden maintenance, will not be able to claim deductions for the travel expenses or costs he or she spent.
- Expenses for Legal Matters
Costs or expenses involved in legal matters, such as document services, legal advice, and many others relating to the rental functions, are tax-deductible.
A good example would be going to court or evicting a tenant due to unpaid rent. Property owners or landlords can claim the costs spent involving the preparation of all relevant legal papers.
That said, investors can offset or make up for the losses they incurred, involving their real estate investments up against their taxable income. As a result, landlords pay lesser taxes when their rental income is lower compared to their expenses because of the deduction from their taxable income due to the loss.
- Pool and Palm Trees
Picture: Erinna Giblin
Maintenance performed on a property garden can claim an immediate deduction.
- Discount on Capital Gains Tax
Every capital gain from an investment property sale requires to pay profit tax. Thus, when you bought and sold a property within a year or twelve months, the capital gain gets added to the total taxable income that you need to pay, increasing your income tax, in return.
However, if you are going to wait for over one year before you are going to sell your property, then you can get the discount from the tax of your capital gains, which is equivalent to 50%, which means you will only consolidate half of the capital gains you will get to your income tax return.
Real estate investors can’t claim the investment property tax deductions stamp duty immediately. It gets added to the cost of the property base. Nonetheless, it can reduce your liability for capital gains tax when you sell your property eventually.
When the property is under the Australian Capital Territory (ACT), the deduction of the stamp duty is available within the year the cost incurred. Otherwise, stamp duty is non-taxable.
This article is on the “Investment property tax deductions: what you do not want to miss out on” write-up, which first appeared and originally published on the website, realestate.com.au.
Things that require your attention:
The information provided above is a general rule or standard and doesn’t impose professional advice. It is always best to seek for recommendations from licensed experts regarding this matter before even doing something or deciding anything.
Conclusively, these are the valuable tips and tricks that you need to remember or consider, so you can claim for tax deductions while building an investment property to compensate for your expenses.