Tax deductions for investment property

By Greg Bell

Being a property investor means staying on top of your different real estate purchases, especially when it comes to keeping an eye on possible investment property tax deductions. When you file your taxes, you don't want to miss out on any ways to boost the value of your investments. Even if you have a certified tax professional accountant on your side to help you manage these kinds of financial decisions, it can be helpful to know what counts as a tax deduction.  Let's take a look at some examples and other helpful tips for your taxes as a property investor.

How to file taxes for your investment property

In Australia, there are specific requirements that investors need to adhere to when they file their personal and business tax returns. If you earn income through your rental real estate properties, there will be specific tax obligations and entitlements. The Australian Taxation Office (ATO) recommends three simple steps to keep in mind when preparing your tax return:

1. Include all taxable income

Report on every single piece of income you receive, especially as a result of your investment properties. ATO says that the rental income is considered assessable income, which means that it can be taxed. Make sure to include short-term rental arrangements, even if the tenant only paid to live in the house for a few months. If you charge rent to someone else who is sharing a part of your current residence, report this on your taxes as an income source. Here are two more examples of investment-related income:

  • Insurance payouts.
  • Rental bond money.

Throughout the year, keep a record of your passive income so that it can be reported accurately when the time comes to file your taxes.

2. Track your expenses

Another important thing to report on your taxes is the expenses resulting from an investment property. Note that you can only claim deductible expenses for the property during the time the property was rented. You can also claim a deductible expense during the time period that you were trying to improve the real estate to find a tenant for tax purposes. 

3. Keep tidy records

One of the most important things you can do to make filing your taxes a little easier is to keep impeccable records. Create a record tracking system to help keep it all — income, expenses, receipts and bank transactions — straight. People who have many investment properties hire a tax professional to help manage their finances since it can be confusing. Here are some records that the ATO says are important to track:

  • Contract of purchase.
  • Conveyancing documents.
  • Loan documents.
  • Costs to buy the property.
  • Borrowing expenses.
  • Proof of earned rental income.
  • All related expenses.
  • Periods of private use by you or your friends.
  • Periods the property is your main residence.
  • Loan documents if you refinance your property.
  • Efforts to rent the property out.
  • Capital improvements.
  • Contract of sale.
  • Conveyancing documents.
  • Sale of property fees.
  • Calculation of capital gain or loss.

Each period of investment, including buying the property, owning it and even selling it, should have documents associated with it that need to be saved.

Finding tax deductions and tax benefits

As a rental property owner, there is a specific rental property tax deduction that is available to you and can be beneficial in the long run. However, some things can't be claimed on your property taxes. When reporting something as an income expense deduction, keep in mind that some items may have nothing to do with your investment strategy depending on how you use the property. Examples include:

  • Your property is only genuinely available for rent for part of the year.
  • You use your property for personal purposes for part of the year.
  • You only use part of your property to earn rent.
  • You rent your property at non-commercial rates (less than market rates).
  • You partially use your investment loan for personal purposes.

What you can claim on investment properties

According to ATO, there are three different types of rental expense categories:

  1. A claim made for the current year: Examples of this include maintenance, repairs and loan interest on depreciating assets costing $300 or less.
  2. A claim made over several years: These kinds of deductions accumulate over several years. Expenses like capital works and borrowing expenses may be included.
  3. Unable to claim a deduction: A real estate investor can't report personal expenses as investment expenses on their taxes. In addition, you can no longer claim any deductions for vacant land that you may own. 

Filing a claim

When it comes time to file your taxes, you must claim qualifying expenses as possible deductions. The first step is to categorise your income status. The two choices for this situation include "Australian interest or other Australian income or losses from investments or property" or "other foreign income' from the overseas property." For more details on how to include rental income and expenses in myTax, watch this informational video provided by ATO.

Maximising your tax return

Tax deductions are one of the easiest ways to maximise your tax return. That is why it's so important to track your expenses throughout the tax year and the time period of your investment property ownership. Save your receipts on items purchased for investment real estate, especially residential rental properties. Keep the proof of ownership and rental periods, especially if you have to do maintenance on the house for the tenant.

As an investor, you should consider working with a professional to guide you in the right direction. They know the tax system in and out, so they can help you understand where you can maximise your tax return.

Capital expenses

Be aware of the capital gains tax (CGT) that business owners and other types of investors have to pay. Your CGT will vary depending on how long you have held the investment. ATO reports that people that have owned the asset for less than 12 months, will pay 100% of the capital gain on their income tax rate. If you own the asset for longer than 12 months, you will pay 50% of the capital gain.

Here is how ATO breaks down capital expenses and taxes:

When you sell an asset for:

  • More than it cost you – you have a capital gain.
  • Less than it costs you – you have a capital loss.

You pay tax on your net capital gains:

  • Your total capital gains.
  • Less any capital losses.
  • Less any discount you are entitled to on your gains.

Are you ready to learn more about investing in property wisely? Reach out to the real estate property experts at Ray White Surfers Paradise. 

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