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A Comprehensive Guide to Investment Property Deductions

investment-property-tax-deductionsA lot of people miss out on maximising their tax return by failing to take advantage of the tax deductions associated with their investment properties. An investment property is a property that is used for income earning purposes. If you live in the house, you cannot claim investment property deductions, and if you live in the house for a part of the tax year, then you must apportion your deductions to reflect the amount of time you use the property for income earning activities. For example, if you lease out a beach house, but you spend each December and January living there, then you can only claim tax deductions for the ten months that you actually lease the property out.

You can only claim the following expenses for the period that the investment property was rented out, or from the time it was advertised and available as a rental property. In order to claim any deductions related to your investment property, you must keep records of the rental income you received and the deductible expenses you paid. You must also keep records of your ownership of the property and the cost of purchasing and selling the property.

Investment Property Deductions You Can Claim in Your Tax Return

Examples of expenses you can claim include:

  • The cost of advertising your property for rent
  • Fees and charges related to the body corporate
  • Bank charges, such as processing and administration fees
  • Council rates
  • Land tax
  • Cleaning, gardening, lawn mowing and pest control
  • Property agent fees and commissions
  • Stationary and postage involved in the administration and leasing of the property
  • Water charges
  • Cost of insuring the property
  • Repairs and maintenance, but only if the repair or maintenance is due to general wear and tear due to tenancy. You can only claim this expense in the year in which you incurred the expense. Completely replacing an item such as an oven, fence, roofing, floor coverings, and so on, need to be depreciated over time and not claimed in full as repairs and maintenance.

Expenses you can’t claim all or a portion of immediately are:

  • Borrowing expenses, such as mortgage set-up costs or loan establishment fees and mortgage insurance. These costs are usually claimed over a five-year period.
  • Capital work deductions (Building Write Off) can be claim if your property was built after 1985. This includes:
  • The actual cost of construction of the building. Eg house. A claim of 2.5% of that cost can be claimed as a tax deduction each year after the construction has been completed.
  • The same 2.5% claim applies to the cost of altering, improving, extending a building. This is deemed the cost of capital improvements (such as an extension).
  • You can claim the interest charged on loans established to purchase the property and to cover the cost of building construction as well as ongoing capital improvements and asset purchases such as floor coverings, curtains, ovens etc.
  • Depreciating assets for their decline in value can be claimed in relation to items such as furniture, fridges, washing machines and dryers. Click here for ATO’s Guide to Depreciating Assets.
  • Legal expenses associated with evicting a tenant who is not paying rent or who is acting in such a way that breaks the terms of the lease can be claimed. You can also claim the loss of fighting the loss of rental income in court and for defending damages claims for third party injuries on your rental property.
  • You can only claim travel expenses if you are making a special trip to collect rent or perform some other duty relating to the leasing of your property. If you go past the property on the way to work or during a holiday you cannot claim travel expenses. Using a logbook is recommended for claiming travel expenses. You can only claim travel expenses after you’ve bought the property, so you cant claim the cost of travelling to view the property, attend the auction or attend an information session on the property.

Its important you keep a record of all the documents of the expenses associated with your rental or investment property. It’s impossible to claim any of these deductions if you don’t have proof of your spending.

It’s also important that you provide accurate information; it’s very easy for the ATO to match information to uncover inconsistencies in relation to rental periods and expense claims. If you keep records and provide accurate information, chances are you’ll save a lot on tax and receive a healthy return.

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