What can you claim on an investment property?

Whether you’re dipping your toes into the property market for the first time or you’re a seasoned investor with a burgeoning portfolio, understanding what you can claim on an investment property can really impact your financial strategy and bottom line. It’s not just about choosing the right property; it’s also about optimising every possible financial advantage available to you.

So, why should you keep your receipts and consult with tax professionals? Because knowing precisely what you can claim could mean the difference between just breaking even and smiling all the way to the bank.

What can you claim on an investment property? Read on to find out.

Understanding investment property expenses

Investment properties are pivotal in many wealth-building strategies, and need careful management of expenses to ensure profitability. Each expenditure, from routine operational costs to major renovations, should be scrutinised for its financial impact.

Key to managing these finances is distinguishing between deductible and non-deductible expenses. Deductible expenses can be subtracted from total rental income, reducing taxable income. These often include maintenance costs, property management fees, and interest on loans for property improvements.

Non-deductible expenses do not reduce taxable income and typically include initial property purchase costs and personal use costs of a partly-rented property.

Common deductions you can claim

There are a few commonly claimable expenses that you should be aware of to effectively reduce your taxable income. These expenses, when properly documented and applied, can turn into big tax savings each year.

Interest expenses

One of the most substantial deductions for property investors is the interest paid on a mortgage tied to the investment property. This doesn’t include the principal amount of the loan; only the interest component is deductible. Make sure you keep detailed records of all interest payments to maximise this.

Repairs and maintenance

The cost of keeping your investment property in good working order is generally deductible. This includes routine maintenance and repairs that restore an item to its original condition but don’t materially add value to the property.

For example, fixing a broken window or replacing a faulty lock are deductible expenses. On the other hand, improvements—like renovations that increase the property’s market value or extend its life—must be depreciated over time.

Pest control is also deductible, depending on who paid for the service.

Property management fees

If you hire a property manager to manage the day-to-day operations of your property, their fees are fully deductible. This can include everything from collecting rent and handling tenant issues to arranging maintenance and repairs. Since property management fees are a common expense for investors who don’t have time to personally manage their properties, this deduction can be pretty beneficial!

Insurance

This includes building insurance, which covers damage to the structure itself, contents insurance for any items owned by the landlord within the property, and landlord insurance, which generally covers both the building and loss of rental income due to tenant default, as well as public liability.

Depreciation and capital works

When we talk about enhancing the value of your investment property, depreciation and capital works deductions are key elements in your taxation strategy.

Depreciation

Depreciation refers to the gradual reduction in the value of an asset over time due to wear and tear or obsolescence. In terms of an investment property, you can claim depreciation on the building itself (if it qualifies) and on the fixtures and fittings within it. This includes items like appliances, carpets, and air conditioning systems.

The Australian Taxation Office (ATO) stipulates useful life estimates for these items, which dictate how long you can depreciate an asset. You typically need a quantity surveyor to prepare a depreciation schedule, which outlines the depreciation claims available over the lifespan of these assets.

Capital Works Deductions

Capital Works Deductions are slightly different. These deductions are related to the building’s structural elements and other permanent assets that are not easily removable. This includes costs associated with constructing the building, renovations, or alterations such as adding a new room, garage, or patio.

Eligibility for these deductions depends on the type of construction and the date it was completed. Generally, the expense is spread over a 25-40 year period at a fixed rate of 2.5% or 4% per year, depending on when the construction was completed.

Operational costs

Operational costs are the ongoing expenses that keep your investment property functional and compliant with local regulations, and many of these can be claimed to reduce your taxable income.

Council rates and land taxes

Council rates vary depending on the location and valuation of the property, and can be deducted the year that you pay them.

Land tax is charged on the land value of your property and varies by state and territory. Both these taxes are generally deductible for investment properties, as they’re considered necessary expenses incurred in the process of generating rental income, but the levy differs state to state.

Utility charges

Utilities such as water, electricity, and gas are deductible only if the landlord is legally responsible for paying these bills. If these expenses are included in the rental charges and the tenant reimburses you, they are not deductible.

If you pay for utilities as part of maintaining the property while it’s rented or available for rent, you can claim these costs. It’s important to keep all receipts and consider having separate meters for rental properties to simplify record-keeping.

Advertising for tenants

Marketing expenses are also an essential deductible cost. If you’re advertising to find tenants, whether through online platforms, print media, or hiring a real estate agent to list the property, these advertising costs are fully deductible.

Strata fees

Also known as body corporate fees, strata fees are typically deductible as they’re considered necessary for generating rental income.

Legal and accounting fees

Legal expenses

There can be a range of reasons you might have legal fees, including costs incurred for the preparation of leasing documents, eviction of a tenant, or legal advice for tenant disputes. These are deductible, although legal fees associated with acquiring or selling your investment property are generally not deductible.

Accounting fees,

You can generally deduct the cost of hiring an accountant to manage the financial accounts of your property, prepare and lodge tax returns, or provide advice on tax matters.

Negative gearing

Negative gearing happens when the cost of owning a rental property exceeds the income it generates. This net loss can be deducted against other income, like wages or business income, which reduces the overall taxable income for you as an investor.

Want to make the most of your investment property?

We can help with that. Our talented Perth property management team is ready to maximise your investment and take care of the nitty-gritty stuff so you don’t have to. Get in touch today!