How does a property tax deduction work?

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property tax deduction
Tax Minimisation
By
Daniel Baldwin
Daniel Baldwin
Principal & Head of Accounting
February 23, 2021
6
minute read

A guide to helping you understand property tax deduction laws and regulations in Australia

Owning and managing a rental property is often seen as an attractive investment option due to the tax benefits they can provide. When managed correctly, your property investment can increase in value, while at the same time providing a smart way to reduce your taxable income.

However, investment property tax deductions can be a complicated process if you’re not thoroughly prepared.

In this article, we’ll take a look into how you can use your property development to maximise the amount of income tax deductions you’re able to claim.

Not sure what you can and can’t claim as a tax deduction for your property? Contact Liston Newton Advisory today and book a meeting to find out where you could be making smarter use of your investment property.

Whether you’re a property developer or an investor, it’s important to know where you stand in regards to the tax treatment of your property development. The tax rules will differ depending on whether you choose to keep the property or sell it.

Property tax deduction basics

Here are the key things you need to know in order to accurately calculate your deductions.

  • The full cost of developing the property — essentially, the amount you paid for the property. This is known as the ‘cost base’. It’s what’s used to calculate the capital gain when you sell the property.
  • The annual running costs and expenses incurred in managing and maintaining a rental property can be considered as tax deductions. Knowing your expenses is a crucial aspect of ensuring that your property is being used to its full potential, for tax purposes.

And when it comes to tax deductions, there are a few key points you need to keep in mind.

  • Property tax deductions can only be claimed while the property or development is rented out, or genuinely available for rent.
  • You can only claim a tax deduction on the percentage as the property is used to generate this rent. So if you rent out 50% of the property, but use the other 50% for personal use, you can only claim 50% of the expenses against the property.

Structuring your property for tax deductions

The first step when undertaking a property development or investment is making sure you structure it in the correct way.

The most common type of rental property investment is through a personal structure, or by two joint partners. It’s the most common, as it’s one of the most effective. If a property is negatively geared then the owners can claim the loss as a tax deduction, using this to reduce their personal income tax.

However, owning an investment property under your personal name exposes your assets to other kinds of risk. For example, you might be the director of a company, or you work in an industry that can expose you to high levels of risk. In these circumstances, you would receive better asset protection using a different structure.

Also, there are different capital gains tax concessions available for different investment structures, so it’s critical to speak to your financial adviser before entering into any contracts. The structure you choose will have a significant impact on both the tax treatment and asset protection implications for your investment.

What you can claim as an investment property tax deduction

tax deduction

The one big rule when claiming property deductions on your investment property is that you need proof of your expenses, and your income. So things like bank statements that clearly show the interest you’ve paid, or receipts for the expenses incurred in managing your property.

Basically, if you want to claim a tax deduction for your property development or investment, you need a receipt. Otherwise, you can’t claim it.

The following list is by no means comprehensive, but will give you a good indication of the types of things you can claim as a tax deduction.

Insurance

Insurance that’s related to renting out your property can be claimed as a tax deduction.

Professional fees

Fees relating directly to your property, including investment advice, financial advice, and bookkeeping, can be claimed.

Agent fees

You can claim a tax deduction on the fee or commission you pay an agent to manage the relationship with your tenants.

Advertising costs

You can claim any costs associated with advertising your property, like ad placing, photographer fees, and agent fees for managing it for you.

Interest on your loan

The interest charged on your loan can be a big deduction for your investment property. If the loan is used across multiple properties, or there’s a personal aspect to parts of it, the interest needs to be apportioned accordingly.

Council and water rates

You can claim these bills as they get paid. However, if your property isn’t rented at the time, they can’t be claimed.

Electricity and gas

If you’re paying these fees as a landlord, and not receiving reimbursement from your tenants, you can claim these costs as a tax deduction.

Land tax

Land tax is an annual state-governed tax that’s charged on the freehold land you own, when it isn’t used as your primary place of residence. It differs state by state, but you can claim this fee as a tax deduction for the times when your property is being rented.

Strata or Body Corporate fees

If your property has a requirement for these fees, then you can claim them as a tax deduction.

Repairs and maintenance

Repairs and maintenance can only be claimed if they’re a direct result of wear and tear on your property, and the repair restores the issue to its previous state. This includes regular upkeep of a garden—but not if you're making changes to the existing garden or plants. That’s considered a capital asset instead, and likely to be depreciated. You can also claim a deduction for any pest control that’s needed when your property is rented.

Home office costs

If you’re the landlord, you can claim deductions on things like stationery, home office costs, and phone bills, proportionate to their use in renting out your property.

Legal expenses

We hope it never comes to this, but any costs incurred in going to court with a tenant, or having them evicted, can be a deductible expense.

[content_aside]You may also be able to claim the costs of building and asset depreciation for your property.[/content_aside]

Building depreciation

depreciation property

You might be able to claim a tax deduction on the depreciation of your building, for the time during which it was rented. This includes any renovations you make to it.

You can’t claim depreciation on construction costs if the property was built prior to 16 September 1987, or renovations completed prior to 27 February 1992. Any buildings or renovations completed after these dates should be eligible.

How it works

You can claim depreciation on the costs of construction, at a yearly rate of 2.5%, for a period of 40 years. So, for example, if the property was built for $250k in 2000, you would be able to claim a depreciation deduction of $6,250 every year until 2040.

Appliance depreciation

When you rent out a building, such as an office space, it can often come with appliances and other assets pre-installed. So things like dishwashers, cooktops, or air conditioning units.

And, much like the building, these appliances depreciate in value as they age. As a landlord, you may be able to claim depreciation over their useful, ‘effective’ life. However, the criteria can be confusing.

You can claim depreciation on the purchase price of the asset if it’s brand new, or if depreciation hasn’t yet been claimed on it.

You can claim a deduction on secondhand assets in your rental property if:

  • You purchased or built the property prior to 7:30 pm on 9 May 2017, and
  • You installed the asset prior to 1 July 2017

We recommend that you get a Tax Depreciation report completed prior to claiming any depreciation costs. To make the process as smooth as possible, we advise our clients to contact our business partner BMT Tax Depreciation. Let us know when you’re thinking about accessing your report, and we can put you in touch.

The final word

As you can see, there are many ways that you can claim a property tax deduction. However, it’s important that you claim the right things, as the ATO can be strict on incorrect deductions.

But the good news is that it’s not a minefield there simply to trip you up. You just need to know the full picture of what’s available for your investment property or development.

So to confirm that you’re making the right decisions on your investment property tax deductions, make sure you get the right advice early on.

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