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The world of property investment isn’t just for high-flying suit-wearers or faceless conglomerates: any savvy Australian with an eye on the market can, and have, purchased an investment property. When carefully considered in line with your income, expenses, and any existing debt you hold, incorporating an investment property into your personal financial strategy can reap great rewards.
Investors can manage costs associated with leasing out and maintaining an investment property by claiming these as tax deductions against income earned from the property and other sources like a salary. We’ve laid out the raft of investment property expenses that are claimable on your tax return, as well as strategies for claiming and costs that can’t be deducted in your return.
Related: Australian Property Market Update
Positive vs Negative Gearing Explained
An investment property is ‘positively geared’ if the expenses involved in renting it out which could be claimed as tax deductions amount to less than the income you earn from it in a given financial year. In other words, you make a profit from owning and leasing the property.
Your investment home is ‘negatively geared’ when these annual deductible expenses are higher than the income generated from renting it out, meaning you make a loss overall. Since property investors effectively increase the supply of rental housing, the government allows them to deduct these losses against other income such as their salary or additional investments.
These allowances for property investors are made in an effort to improve housing affordability. In theory, an investor will be inclined to keep rent lower if they can generate income from their investment through tax benefits in the long term, aiming to grow the value of the asset over time to make a profit down the line when it’s sold. Thus, many owners use negative gearing as a strategy for managing their investment properties.
Investment Property Tax Deductions to Claim Immediately
Investors can incur a range of costs related to the management and upkeep of their investment property across any given financial year. You can claim the following costs as tax deductions for the portion of time that the property has been rented out (or as long as it has been available for rent in some cases).
Property management and maintenance
This includes everything from costs involved in advertising the property for rent through to cleaning, gardening, and pest control, or strata fees if your property is part of a body corporate (be sure not to claim maintenance fees twice if this is covered by strata). If there are any utilities not paid by your tenants as part of the leasing agreement – as is often the case with water supply – these are also claimable.
Property agent fees
If a property agent manages the needs of your investment home and its tenants, their fee is claimable as a tax deduction. This may also include advertising costs if you arrange this through the agent.
Legal, accounting, and other admin costs
There are aspects of investment property management which may require guidance from professionals such as lawyers and accountants. Happily, what they charge is deductible on your return.
If you’re sorting out various admin tasks at home, you can claim the usage of personal equipment like your phone, internet plan, and even stationery on tax. But be sure to only claim the portion of those costs associated with the management of your investment property.
Interest on your home loan
Depending on the size of your mortgage and its home loan interest rate, this could be the most significant tax dedication for an investment property owner. To be able to claim mortgage interest payments on tax, you’ll need to have purchased the property with the intent to rent it out as an income-earning asset, meaning you’re paying down an investment home loan.
Some buyers may purchase a property as both an owner occupier and an investor, with a plan to rent out part of the property if it has a granny flat on site or a spare room. In this case, deductions for interest payments must reflect the income-earning portion of the property. This can get a little complicated if you’re sharing the space with a roommate, so it’s advisable to seek advice from qualified experts.
Council rates and land tax
Land tax, council rates, and water rates (including charges and usage) are all claimable on tax so long as your investment property is rented out. If there’s a period of the year where the building wasn’t occupied, then you can’t deduct taxes and rates for this timeframe. When it comes to land tax, be sure to check the specific requirements of the state or territory you live in, as deduction rules and timing for when to claim on costs varies.
Repairs that maintain the property
Repairs around the property can be immediately deductible, but they must be distinct from any improvements or renovations which could be seen to increase the value of your home. For example, repairing a leaking ceiling is immediately deductible, but retiling the entire roof for aesthetic appeal isn’t.
Insurance
It’s advisable to take out home insurance that covers the structure of your home as soon as you make a property purchase, so you’re financially protected in case an unforeseeable event damages your home. This is claimable on tax for investment property owners, including a more specialised policy type called ‘landlord insurance’. This home insurance variation covers owners for additional potential costs like loss of rental income in certain circumstances and damages caused intentionally by tenants.
Investment property management education
If you’d like to take an educational seminar or course on managing an investment property, this can be tax deductible. However, you must already own an investment property for this to be claimable.
Investment Property Tax Deductions You Can Claim Over Time
Some expenses related to your investment property need to be claimed over a longer timeframe, rather than the amount that was incurred in a given financial year.
Depreciation of the property and appliances
The cost of general wear and tear around your property can be recouped by claiming property depreciation on your tax return, which is another major investment property deductible. Depreciation can be claimed across two categories:
- Division 40 assets or ‘plant and equipment’, which refers to easily removable property fixtures like carpets, dishwashers, and air conditioner units.
- Division 43 assets or ‘capital works’, which refers to the structure of the home on your property and any permanent fixtures, as well as improvements you make to the building (like adding an additional room). The deduction rate for capital works depends on the date of your investment home’s construction or subsequent renovations, so be sure to check the Australian Taxation Office’s (ATO) depreciation and capital allowances tool to get an estimate of the deductions you qualify for in this category.
Borrowing expenses
Property investors can claim costs associated with taking out a loan to purchase a property over five years. This type of tax deduction doesn’t consider ongoing interest repayments, but can include fees for home loan applications, property valuations, and lenders mortgage insurance (LMI).
What Can’t You Claim on Tax For Your Investment Property?
There are certain costs that aren’t claimable on your tax return as a property investor. These include:
- Stamp duty on the property purchase
- Certain costs related to purchasing the property (including the purchase price as well as legal and conveyancing fees)
- Repairs or renovations you make to the property immediately after purchase (before it’s tenanted)
- Travel expenses to inspect the property
- Any bills that have been paid by tenants
- Any portion of borrowing costs where the funds were for personal use
- If you incur any expenses when using the property personally
- Anything related to selling the investment property, including advertising, legal and conveyancing fees, agent fees, and reports
- Expenses incurred during any time when the property isn’t available for rent
Frequently Asked Questions (FAQs)
How Do I Claim Investment Property Expenses in My Tax Return?
You’ll need to provide your investment property information on your tax return, including details like rental income, council rates, and interest you’ve paid on any loans you took out to purchase the property. If you own the property jointly with someone else, you’ll also need to state your portion of the investment as a percentage.
Then, fill out the deductions section, putting costs for that financial year or depreciation under the relevant headings. Put any remaining expenses that don’t fit in these categories under ‘Total other expenses’. You can include details for multiple rental properties in your tax return, and this collective income will be added to your overall taxable income.
Can I Live at My Investment Property and Still Claim Tax Deductions?
Yes, as long as you’re still leasing out part of your investment property, you can live there as your primary place of residence and claim tax deductions. However, the dedications will only relate to the portion of the property that’s being leased, such as a granny flat or a spare room. So, deductible costs are likely to be much lower than if you rented out the entire property.
What is Capital Gains Tax?
An investment property owner can make a ‘capital gain’ if they sell their property and make a profit after deducting the initial purchase price, plus costs associated with purchasing the property and then selling it. Like any other form of income, this profit is taxable.
The percentage that is taxed through capital gains tax (CGT) depends on your income bracket, how long you own the property before selling it, and potentially when you bought it (considering inflation). You can calculate your CGT through the ATO.
Australian residents can receive a CGT discount of 50% if they own an investment property for more than 12 months before selling it.
