How to claim the most deductions out of your Rental Property
Paying high tax? Want to spend money in the right way to reduce tax liability?
Investing in property is a common choice. There are many expenses that you can claim as a tax deduction from a rental property. Sometimes, the allowable deduction may exceed the rental income thus creates a loss position, this is referred to as negative gearing.
The rental loss can even apply against your other income such as salary or business income.
To maximise your deductions on investment property, we should be mindful of the following things.
Deductions you can claim even when the property is not rented out
Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent – that is:
- The property is advertised, giving it broad exposure to potential tenants
- Considering all the circumstances, tenants are reasonably likely to rent the property.
Therefore, even though your property is not actually rented out during the advertisement period, the costs are still deductible given the condition that the property is available for rent.
The cost such as advertising with local real estate agencies and posting advertisements in newspapers is a claimable expense as this cost is used to attract tenants which are associated with generating rental income.
Body Corporate fees
Strata fees are a perfect example, these fees are a claimable expense.
All costs related to council expense are deductible.
This cost is related to the fee generated on borrowing money for the purchase of the property. Not the interest that is generated. These costs are deductible over the period of the loan or over a 5 year period if the total borrowing expense is more than $100.
You can claim the following as borrowing expenses:
- Loan establishment fees
- Lender’s mortgage insurance (insurance taken out by the lender and billed to you)
- Title search fees charged by your lender
- Costs (including solicitors’ fees) for preparing and filing mortgage documents
- Mortgage broker fees
- Fees for a valuation required for loan approval
- Stamp duty charged on the mortgage (Stamp duty charged by the state/territory government the property)
This is deductible and includes dump fees, mower expenses, tree lopping, replacement garden tools, fertilizers, sprays, and replacement plants.
Land tax is the tax imposed based on the value of the land which is also tax-deductible. Notice of assessment of the land tax payable will be shown after a land tax registration form is lodged.
This cost is also deductible if you have paid for the pest control services.
Repair and maintenance cost
The cost of repairing is deductible in once but this is to be differentiated from improvements and replacement because in these cases, they will be treated as new assets and they can be claimed under depreciation for normally over a number of years. Therefore, the cost is only claimable for at a certain rate each year for its useful life.
When we say ‘repairs’, we mean work to make good or remedy defects in, damage to or deterioration of the property. For example:
- Replacing part of the guttering or windows damaged in a storm
- Replacing part of a fence damaged by a falling tree branch
- Repairing electrical appliances or machinery.
When we say ‘maintenance’, we mean work to prevent deterioration or fix existing deterioration. For example:
- Painting a rental property
- Oiling, brushing or cleaning something that is otherwise in good working condition
- Maintaining plumbing.
Low cost asset
Depreciating assets costing $300 or less can be claimed an immediate deduction. For example, you can claim the working table desk immediately if the cost is less than $300.
Calls that are directly associated with the running of the investment property are tax-deductible.
Travel undertaken to inspect the property or collect the rent
Travel expenses include:
- Preparing the property for new tenants (except for the first tenants)
- Inspecting the property during or at the end of tenancy
- Undertaking repairs, where those repairs are because of damage or wear and tear incurred while you rented out the property
- Maintaining the property, such as cleaning and gardening, while it is rented or genuinely available for rent
- Collecting the rent
- Visiting your agent to discuss your rental property.
Water rates are tax-deductible if you, not your tenant, pay the water bill. Whilst the above expenses are the most common deductibles on investment properties they may be other deductions that you are entitled to specifically relating to your investment property.
Refinancing – Penalties on early repayments
With low interest rates, you may be considering refinancing. Where you have not used an Offset type loan facility, you may have to pay a penalty for early termination of a fixed interest loan or interest and principal loan. This generally represents the loss the bank makes where they have borrowed and or lent at a high interest rate and now they can only re-lend at the lower rate.
The additional fee, call it a penalty or additional interest on the termination is tax deductible in the year it is incurred. To maximise the tax deduction do it before 30 June.
You can also claim the interest you have pre-paid up to 12 months in advance. Therefore, if you are expecting to have a much lower income next year for reasons such as maternity leave, then you should pay interest in advance to reduce your higher income this year. Because there will be less tax withheld during the lower income period, where you do not need a high expense to claim back all your tax.
You can claim the interest charged on the loan you used to:
- purchase a rental property
- purchase a depreciating asset for the rental property (for example, to purchase an air conditioner for the rental property)
- make repairs to the rental property (for example, roof repairs due to storm damage)
- finance renovations on the rental property, which is currently rented out, or which you intend to rent out (for example, to add a deck to the rear of the rental property)
- purchase land on which to build a rental property
Property built after 1987 are subject to a special building depreciation under capital works deduction under Division 43 ITAA 1997. For those properties, it may be worth hiring a quantity surveyor for a depreciation schedule. The cost of the depreciation schedule (also tax deductible) can normally be recouped within the first few years as the depreciation value are normally in thousands.
You can claim the cost of the following as income tax deductions:
- Evicting a non-paying tenant
- Expenses incurred in taking court action for loss of rental income
- Defending a damages claim in respect of injuries suffered by a third party on your rental property.
Stationary and postage
The cost associated with pens, paper, and other office works related stationery and postages used for rental property to interact with tenants/ agent are also deductible.
Landlord insurance to cover the property from being destroyed or tenants doing damages are a claimable expense.
Agent charges for managing the property, which includes commission and GST, they might charge the percentage of rental income as well. Those costs are deductible.
If improvements are to be made to the rental and throwing away all the old applications of items such as curtains and light fittings, fridge, etc. Then you can write off the remaining value of these items as a deduction.
Questions? Contact our friendly tax accountants to maximise your deductions.
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