As an investor you are concerned with returns, with each dollar you claim on an investment property helping you get closer to your personal and lifestyle goals.
Unfortunately for many investors they fail to take full advantage of the tax benefits of their investment property. This is generally due to poor financial advice and education on the investor’s behalf.
I have written this blog to help you identify exactly what you can and cannot claim on a negatively geared investment property in the hope that you can move forward with your next property faster.
The majority of Australians purchase negatively geared investment properties for the following reasons:
- They are easy to find
- They can offset your personal income tax
- They are generally close to major cities, where the potential for capital growth is higher
- 90% of the property market is made up of these properties
With a negatively geared property the net loss generated can be offset against other income, reducing the tax that would be otherwise payable on that income.
Therefore, the more deductions you can claim on the property, the higher your tax benefit.
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Interest is by far the largest tax deduction in a negatively geared arrangement. As an investor you can claim tax deductions against the interest incurred for money used to purchase a property, undertake repairs or improvements, or deal with tenets.
2. Tenancy costs
The costs of advertising, renting, insuring and traveling to a property are all tax deductable, as are any legal fees incurred. It is good practice to keep all receipts, invoices and a travel diary for a property.
3. Repairs and maintenance
The cost of restoring something to its original condition due to tenant wear and tear is tax-deductible, provided it is not “initial repairs” – damage that existed when the property was purchased. Initial repairs and structural improvements can be depreciated using a quantity surveyor. It is important to speak with your accountant and identify what is considered an improvement and repair.
4. Depreciating assets and capital works
Depreciating assets are stand-alone functional units that are not generally affixed to the building that decease in value over time. Examples include clothes dryers, dishwashers, curtains and carpets. While the cost of buying a depreciating asset is not, in general, tax-deductible upfront, the cost may be depreciated over the effective life of the asset and claimed as a tax deduction over a number of years. It is important you get your accountant and a quantity surveyor to prepare a depreciation and capital works report for your property.
Capital works expenses are generally not tax-deductible upfront. Unlike depreciating assets, capital works are generally done on things that are affixed to and become part of the land and building, such as an extension, structural alteration or and structural improvement, such as a retaining wall or a sealed driveway.
The construction expenditure incurred on the work can generally be claimed at 2.5% per year on a straight-line basis over 40 years.
5. Other holding costs
Holding costs are other monies that go into owning a property and include body corporate fees, cleaning costs, gardening costs, building and contents insurance premiums, rates, security monitoring costs, pest control, and property manager’s fees. These costs are generally tax-deductible upfront.
Understanding these tax benefits are vital and will help you capitalise on your investment.
For more information on ways to maximise your tax savings take a look at your investment properties article 6 things you can claim to maximise your tax savings here.
The information provided in this blog is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.