Most people are aware that there are a number of tax breaks and benefits you can claim by just owning a property, even if they're not exactly sure what they are.
It should come as no surprise, though, that you have to be careful and patient if you want to take advantage of these benefits. Different ownership structures have their respective tax deductions: an owner-occupier does not have the same tax breaks as a property investors. It would be wise to seek professional advice if you think you are qualified for these benefits.
Are you working from home?
A 2013 study released by the Australian Communications and Media Authority revealed that 51% of employed Australians use the internet to work from home. If you are amongst these digital workers, you are in for a treat in terms of tax deductions.
In cases when you work solely in a dedicated home office, you will be able to deduct these things from your taxes: mortgage payments, home insurance, depreciation of office equipment, maintenance for your office, telecommunication costs (phone and Internet connectivity), and utility expenses including gas and electricity.
For those who have dedicated office but do not work solely from home, you can still deduct some of the things mentioned above, except for mortgage payments and home insurance.
If you do not have a dedicated office but you solely work from home, you can still avail yourself of certain deductions, but only the depreciation of office equipment and telecommunication costs.
Take note: residences are normally exempt from Capital Gains Tax (CGT) when sold. However, if you have a home-based business, you may potentially not receive the full CGT exemption.
Is your property negatively geared?
One of the wonders of negatively gearing your property is the tax breaks the strategy entails. This is especially beneficial for property investors who rent out their properties.
Just to put a little context: negative gearing is based on that the value of the interest you are paying on your mortgage and other expenses. The losses you incur in your property can be used to reduce your taxable income. Sounds confusing? Check our our guide to negative gearing if you're looking for a more in-depth explanation.
In this arrangement, the largest tax deduction is the interest incurred on the money you borrowed for the property. It should be noted, however, that the deduction would only be available to the extent that the borrowed money is used for income-producing purposes. That means if a loan was used to purchase a home and a rental property, only the interest that is attributable to the latter will be tax deductible.
Another item which you can claim as a tax deduction is the repair and maintenance cost. These are costs associated with the restoration of a property due to wear and tear. Restoration works, such as repainting, replacing damaged windows, fixing a leaking faucet, or changing broken floors, are tax-deductible, so long as they are not initial repairs.
Restoration works are different from home improvements, as the latter are considered capital in nature and will be included in the property's cost base.
For capital works expenses, deductions are generally spread over a period of 40 years, as per the tax office. With a rate of 2.5% to 4%, deductions apply to capital works such as building or extension, alterations, and structural improvements.
Depreciating assets such as ovens, cooktops, curtains, heaters, air conditioners, hot-water systems, and clothes dryers can also be used to reduce your taxes. In this case, the value will be based on the purchase cost of the item. You might want to check the Australian Taxation Office for the suggested depreciation rates for different assets.
Tenancy costs are also tax-deductible, so as any cost incurred in relation to preparing the lease with your tenant. Landlord insurance premiums, as well as legal expenses required for evicting a tenant, can also be claimed as deductions.
Do you have a spare room to rent out?
If you have an extra room in your house, it would be wise to rent it out as not only it can generate some extra income, it can also make you eligible to claim some tax deductions.
The treatment for this kind of situation is the same for any residential rental property. The difference lies in how much you can claim. In this case, you have to apportion the expenses on a floor-area basis based on the area solely occupied by the renter.
Additionally, you can only claim expenses when the room is occupied. Once you use the room for personal purposes, you can no longer avail yourself of these deductions.
An important reminder
Whether you are an owner-occupier or an investor, it is a must for you to keep records such as receipts and proofs of purchase to substantiate your tax claims. You also have to make it a habit to list small expenses that you cannot get any kind of receipt for. If you are a home-based worker, make sure that your determine items which you solely use for your business like phone accounts.
If you're looking for an easier way to keep track of all your deductions, ATO has released a mobile tool to do exactly that.