The tax benefits of property investing

Property investing is a great way to produce cash flow and capital growth, but what many would-be investors forget about is that real estate is also a fantastic way to help minimise your tax bill.

In Australia, landlords are able to offset any losses on their rental property against their assessable income. What this means is your rental property can help you pay less tax.

The way this works is that you can claim your property-related expenses as tax deductions which are subtracted from your overall assessable income tax. This is a huge advantage to everyday income earners, who generally have very few options to minimise their tax bills.

Here are some deductions that property investors need to be aware of.

Depreciation

One of the biggest advantages property investors have is their ability to claim depreciation. Just like when you buy a car and it wears out over time, so too does a property. In the eyes of the Australian Tax Office (ATO), you can claim that wear and tear on the built portion of a property.

If your investment property was built after 16 September 1987, you could claim a tax deduction on the building depreciation costs.

 The ATO allows you to claim the costs of the wear and tear on the building over a period of 40 years, which means you can claim 2.5% of the value each year.

If you decide to do any renovations on your investment property, the construction cost is also tax-deductible. However, unlike repairs or maintenance costs, the construction costs are not fully deductible in the same year that you pay for it and need to be claimed over 40 years.

It’s also a good idea to obtain a quantity surveyor report which breaks down the different items that make up your property. For example, something like carpets, fixtures and fittings or cabinets can actually be deprecated at a faster rate than the building itself. This means you can claim a higher percentage of the costs each year and reduce your tax bill further. The cost to obtain the report is also tax deductible.

Interest expenses and loan costs

With interest rates rising, the good news is that this is tax deductible. Properties are only eligible if they have been rented or are available to be leased in that financial year. 

The costs that come with obtaining and having a home loan are also tax deductible. This means things like application fees and reports from valuers can be deductible.

Accounting costs

There are also other costs that come with managing a rental property and that includes the costs of preparing your tax returns. Accounting fees are tax deductible, along with other fees.

This includes fees for the preparation and lodgement of your tax return and activity statements, travel to obtain tax advice from a professional tax adviser, and any taxation appeals lodged on your behalf.

Rental expenses

When you own rental properties, there are all kinds of costs that you will be required to pay that you can also claim as a tax deduction.

Some of the most common include body corporate fees and charges, council rates, water rates and land taxes.

However, it’s important that you don’t forget other costs such as advertising for tenants, cleaning, gardening, pest control and insurance. The cost of property management fees and commissions is also going to be one of your larger expenses.

Property repairs and maintenance can be claimed in the same financial year in which they occurred and don’t need to be depreciated.

You can also make claims for any travel you do that’s directly related to the property, such as inspections or rent collection. 

Regardless of what costs you might incur, it’s also vital that you keep a record of everything and practice good record-keeping in the event your accountant or the ATO needs to see evidence of what your rental property expenses were.