Knowing what you can, and can't, claim on your rental property will help you maximise returns, boost cashflow and stay out of trouble with the tax man.
Like all properties, a rental investment comes with a range of costs. Unlike your home though, many of these costs can be claimed on tax and offset against rental income. This makes a rental investment more affordable however strict rules apply about the types of investment property expenses that are tax deductible.
Speaking to your accountant or tax professional is the only way to know exactly what you can claim on your particular property. But as a guide, let's take a look at the main sorts of expenses you can usually claim while the property is being rented out. Bear in mind, you will need evidence of these costs for tax records.
Rates and insurance – council and water rates (note water consumption is usually paid by the tenant), strata levies and body corporate fees, plus premiums on landlord insurance can generally be claimed on tax.
Upkeep – regular maintenance costs like gardening, cleaning, and pest spraying are tax deductible. The grey area is repairs. If an item is replaced in full, like, say, a broken hot water heater, the expense is normally a ‘capital' cost that will be depreciated over time. If you're able to fix the hot water heater by replacing only the element, this is typically regarded as a repair. Check with your tax adviser.
Financial costs – annual land tax and interest on the investment loan can be claimed on tax. Upfront costs like stamp duty are added to the cost of the property and used to determine capital gains tax that may apply if you sell the place at a profit.
Administration costs – a range of admin costs are tax deductible includingproperty management fees, bookkeeping and accounting fees, advertising costs to attract tenants and lease fees.
Depreciation – a valuable non-cash expense
Unlike the costs noted above, depreciation is a non-cash expense meaning you can claim a tax break without having to dip into your hip pocket.
Broadly speaking, depreciation can be claimed on capital works – chiefly the building itself; and also plant and equipment, which covers items like curtains, appliances and carpets.
Importantly, capital works deductions can only be claimed for properties constructed after 15 September 1987. However renovations to properties built before this date may also be depreciated.
The key is to organise a depreciation report from a qualified quantity surveyor. It's one of the best ways of ensuring you claim every bit of depreciation you are legally entitled to.
Be sure it all stacks up
The potential tax savings of a rental property are often a key point of appeal for landlords. However the property should still stack up as a solid long term investment offering the potential for healthy capital growth and ongoing rental yields.
If you're planning to invest in property, learn more about what's involved and enjoy expert advice on your choice of property investment loan by speaking with your Mortgage Choice broker or call us today on 13 77 62.