Investing in residential rental property is one of the most common assets Australians acquire to create wealth. There are many tax benefits available to investment property owners, with financial year end approaching, we have listed the top ten tax deductions for owners of residential rental property.
Interest is usually an investment property owner's single biggest deductible expense. This includes interest payments on loans used to acquire or improve the investment property. If only a portion of the loan relates to the property, then the interest must also be apportioned accordingly.
Individuals may claim up to 12 months of investment property interest in advance if they are permitted by their financier to pay such interest upfront.
Assets purchased or included in your rental property are not fully deductible in the year in which you pay for them. Instead, the property owner can claim a proportionate value over time, called depreciation. The depreciated value is a non-cash deduction that offsets income of the property owner. The depreciation amount will depend upon the depreciation method used and timeline applied. Quantity Surveyors can prepare a report with a schedule of the amount to claim each year. After the initial outlay of the surveyor's report (which is deductible also) no outlays are required to receive the deduction. Any further purchases less than $300 are immediately deductible.
- Capital works
The construction cost of a rental property is also not fully deductible in the year in which you pay for it. Instead, the property owner can claim a proportionate cost of the construction costs over time, called Capital Works deductions. Quantity Surveyors can prepare a report with a schedule of the amount to claim each year in association with the depreciation. For buildings constructed after 1987 this is generally 2.5%. Again, this is a non cash deduction that requires no outlays after the initial report.
- Repairs & Maintenance
The cost of repairs or replacements to rental property (provided they are not improvements) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing roof leaks, plastering, plumbing and replacing broken windows. If it provides something new and generally changes the character of the item it may not be classified as a repair but an improvement. This means you cannot obtain an immediate deduction but you will be still be able to claim over a period of time as either depreciation or capital works. Regular preventative maintenance is also deductible, e.g. gardening and pest control.
Investment property owners are entitled to a tax deduction whenever they travel to inspect their rental property or to collect the rent.
If you drive a vehicle to your rental property, generally you have two options for deducting your vehicle expenses. You can:
- Keep a logbook and deduct your actual expenses (i.e. petrol, upkeep, repairs) apportioned by the logbook percentage
- Use the standard kilometre rate (74 cents per km for 2014)
If you travel overnight for your rental property, you can deduct your airfare, accommodation, meals, and other expenses. However if you are inspecting your property in association with a holiday, it must be apportioned.
If you travel overseas to inspect your rental property, you may be able to deduct some expenses depending on the purpose of your trip. If the main purpose of the trip is a holiday then you would not be able to deduct airfares only the local expenses incurred to visit the property.
- Legal and Professional Services
You can deduct fees that you pay to property management agents, accountants, lawyers, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses in the year they are incurred as long as the fees are paid for work related to your rental income. If they relate to the purchase or sale of your property then they will be considered a capital expense.
- Body Corporate Fees and Charges
If your investment property is a townhouse or unit you will likely incur body corporate fees. These fees are deductible as soon as they are incurred. They are often levied as an administration charge to cover day to day expenses and a sinking fund charge. Even though sinking funds do cover expenses for capital items you can still deduct these fees immediately. If however a special levy is raised for a major capital item, that levy will not be immediately deductible.
Council Rates, Water Rates and Land Taxes that you incur for your investment property are immediately deductible. Keep in mind though if you do recover any charges such as excess water charges from your tenant then this will need to be returned as income.
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes home and contents insurance for rental property, as well as landlord liability insurance. If you would like any advice regarding rental property insurance, please contact Nathan Case of our general insurance division.
- Bank fees & borrowing costs
You can deduct any bank fees or charges associated with your investment property bank accounts as soon as you incur them. You can also deduct the cost of borrowing over 5 years. This covers items such as valuations, loan establishment fees and lenders mortgage insurance.
To maximise your rental property deductions, please speak to your Hanrick Curran adviser or call 07 3218 3900 and ask to speak with one of our Business Services specialists.