Tax tips for Property Investors
Rental income is a tax assessable income but outgoings against your investment property are tax deductable and can be offset against other income. These allowable deductions will help reduce your taxable income.
If you are a part owner of a rental property, you need to show your share of the rental income and expense in the tax return, same proportion as shown on the legal title of the property. If you jointly own a property with your wife or husband, and your partner is not working, you still will only be able to claim your share of the expenses.
When expenses relating to an investment property are greater than the income from the investment property, the net loss can be deducted in your tax return, against other income. This is called negative gearing.
Negative gearing is not everyone’s cup of tea. Those invest in many properties solely to make negative gearing gains, may struggle to make payments as their cash flow is negative. But in recent years Australian property values have experienced exponential growth. It is beneficial to negative gear when the capital growth of the property is greater than the negative cash outlay.
What all can be tax claimed?
- Interest charged on the loan against the investment property.
- You may also claim interest on loans you have taken to finance renovations, purchase depreciating assets or undertake repairs on the property.
- Investment property owners can claim a deduction for depreciation on plant and equipment, renovation or capital improvements undertaken, and the building itself. ATO has a comprehensive list of more than 230 items that can be depreciated.
- Borrowing expenses related to the loan.
- Legal expenses related to the property.
- Repairs and maintenance done to the property.
- Travel expenses related to the investment property
If your investment property is built after 18th July 1985, you can claim a depreciation on the building. Get a quantity surveyor organise a depreciation schedule for your property. The building is written off in 40 years for the structural element of the building including fixed and irremovable items. I t is based on the historical building costs.
When the investment property is sold, the amount claimed for the building write off is reduced from the cost base.
Below is a brief explanation of the two methods employed to depreciate property for tax purposes
Prime Cost Method (Straight line method)
Depreciation Prime Cost Method – (Cost x days owned/365) /plants effective life in years
Diminishing value Method –
(Opening un-deducted cost x number of days owned/365) / 200% of plant’s effective life in years
Use 150% if the item is purchased before 10th May 2006.
The diminishing method needs to subtract the value of the previous year(s) claim, before working out the deductions for the current year.
In Prime cost method you are claiming constant depreciation reduction for the life of the property. In diminishing value method, reductions are cumulatively higher in the first few years.
The investors can pool depreciable assets with written down values lower than $1000 and depreciate them at a more favourable pool rate of 37.5%. Depreciable assets with costs below $300 gets immediate deduction.
New assets under the cost base of $1000 purchased during the year are allocated as low cost assets and can be depreciated at a flat rate of 18.75%. It eliminates the need to have separate calculations for each assets for the number of days owned. For subsequent years they are depreciated at the normal pool rate of 37.5%.
Borrowing costs of the loan
Borrowing expenses for organising the loan to purchase the property are tax deductible. If the borrowing costs are $100 or under they can be claimed in the first year itself. If it is above $100, the expenses has to be spread over five years or for the length of the loan, whichever is less. Loan establishment fee, LMI, Broker fee, stamp duty charged on mortgage, cost for preparing documents, title search fees charged by lender are comes under borrowing costs of the loan. Stamp duty charged by the state Government do not form borrowing cost, instead included in calculating the cost base of the property for Capital Gains Tax calculations.
Legal expenses related to the leasing of the property like: preparing tenancy agreement, costs incurred in evicting a non-paying tenant are deductible.
Repairs and Maintenance
Repairs and maintenance done to your rental property are deductible. Replacement could be a result of wear and tear or due to damage. Capital enhancement to the property are not deductible. Initial repairs to rectify damage and defects for a property newly purchased are considered capital in nature and not deductible. These adds up to the cost base of the property, and becomes part of the depreciation schedule. Landscaping and major renovations comes under capital enhancements.
If you no longer rent the property, the cost of repairs may still be deductible if the repairs arise from a period when the property was an income producing asset.
Travel expenses for property inspection or maintenance
The cost of travelling to inspect, maintain or collect the dues of a rental property are tax claimable. A full deduction is allowable if the sole purpose of the trip is related to the investment property.
Other deductions on your rental property
If you have incurred the following items of expenditure you are entitled to claim deduction in the year the expenses have incurred. The list is not inclusive of all deductible expenses.
- Council rates
- Land tax
- Strata levies, body corporate fees and charges not related to capital enhancements done by the body corporate.
- Pest control expenses
- Water rates
- Building and contents insurance
- Cleaning charges
- Expenses related to renting the property like property agents fees
- Quantity surveyors fees
- Lawn mowing expenses
Author : Sandeep Karayi , Karayi Home Loans