Investing in property – tax planning

By Nila Sweeney

Buying an investment property can be offer some nice financial rewards, despite the initial outlay. Being up to date with the latest tax incentives, and seeking professional taxation advice, you may be able to claim a majority of the expenses associated with the purchase, ongoing maintenance and the process of generating income from your investment property, as tax deductions.

Below is a list of tax claimable expenses that you should include in your annual tax return to help maximise your savings.

Advertising for tenants
This is a claimable expense providing it’s strictly advertising for tenants if your property is available for rent. These costs include advertising with local real estate agencies and posting advertisements in newspapers or local publications. Advertising for the sale of a property is a capital expense and can only be taken into consideration as part of the cost base of the property on disposal.

Bank charges
The bank charges on your loan account (usually in the form of monthly fees) are tax deductible as well as any bank charges on a separate bank account that you have specifically for your property.

Body corporate fees
These are generally paid quarterly and cover the running costs of the building. It covers repairs, insurance, gardening, communal lighting, pest control, etc.

Borrowing expenses
These are costs associated with the borrowing of money required to purchase the property and although are not deductible upfront, they are deductible over the shorter of either the period of the loan or five years. These include mortgage insurance, title search fees, registration of mortgage, costs for preparing and filing mortgage documents, mortgage broker fees, valuation fees, stamp duty on mortgage and loan establishment fees.

Capital works
You can claim a tax deduction for construction expenditure, or capital works. The deduction is spread over 25 or 40 years depending on the type of construction and the year in which the construction was completed. The construction costs of a newly built property are deductible over 40 years. To maximise your tax deductions you can obtain a quantity surveyor’s report, which will list the year of construction, the construction costs, and the deductible amount each year.

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Council rates
Council rates are imposed on landowners to help fund the cost of community infrastructure and services to the local municipality. Councils generally offer a one-off annual payment or a payment plan of quarterly instalments and all payments are tax deductible.

Decline in value of depreciating assets (also known as “Depreciation”)
To maximise your tax deductions you can obtain a quantity surveyor’s report which shows, in detail, the value of the deduction to which you are entitled based on the assets you own in the investment property. Alternatively, you will need to supply your accountant with information to support the purchase date and purchase price of each asset. Depreciating assets produce a partial tax deduction as these assets decline in value over time, usually over more than one year. Depreciating assets commonly found in residential rental properties include: air conditioning units, removable floor coverings, window curtains and blinds, dishwashers, furniture, heaters, hot water systems, refrigerators and freezers, stoves, cook tops and range hoods, swimming pool filtration and cleaning systems, television sets and washing machines.

Gardening and lawn mowing
This is deductible and includes dump fees, mower expense, tree lopping, replacement garden tools, fertilizers, sprays and replacement plants.

Insurance can be purchased to protect your investment properties. Insurance cover is tax deductible and can protect you against circumstances including loss of rent, rent default, theft by a tenant, building damage and public liability claims.  Mortgage insurance is not immediately claimable but is amortized/depreciated over time as part of borrowing expenses.

Interest expenses
Interest charges on a loan are tax deductible. Principal or capital repayments are not tax deductible. Only the interest component directly related to your property is tax deductible. If you are paying principal and interest on your loan then you will need to calculate the interest component for the year. Locate the bank loan statements for each investment property to ascertain the interest paid for the income year.

Land tax
Land tax is tax deductible. Land tax is a tax levied on the owners of land and it is based on the value of land. Once you’ve completed a land tax registration form, you will be sent an assessment notice showing the land tax payable on the land you own. You will be liable for land tax if you own, or part-own: vacant land, a holiday home, an investment property; or a company title, retail, commercial or industrial unit.

Legal expenses
Legal expenses are generally incurred during the sale or purchase of an investment property. The legal costs for buying and selling a property are not tax deductible and are included in the capital gains tax calculation. Tax deductible legal expenses include the costs of evicting a non-paying tenant and the costs of terminating a lease.

Pest control
If you pay for your investment property to be sprayed or fumigated, you will generally be entitled to a tax deduction.

Property agent fees or commissions
A property agent charges fees for maintaining a property on your behalf. The charges for the year-end financial statement, reference-check fees, leasing fees and monthly rental statement fees are all tax deductible. You will receive the net rental income after the property agent deducts their monthly fee.

Repairs and maintenance
A repair is generally tax deductible. Renovations, improvements, replacements and extensions are treated differently to repairs and maintenance. Renovations, improvements, replacements and extensions are generally deductible over more than one year.

"Repairing" is restoring the item to the condition it was in before it deteriorated without changing its essential character. If you "replace" an item with similar parts/materials then it is also a repair even though you repaired the entire item. If the item is "repaired" with improved parts/materials, which will improve the function of the item or extend its life then it would be considered as an improvement and need to be included as a new asset.

Keep a record of all your stationery and postage expenses for the year. Don’t dispose of your records. This is an often overlooked tax deduction by investment property owners.

Tax-related expenses
The cost of obtaining tax advice from a registered tax agent is tax deductible. Tax preparation fees and accounting charges are also tax deductible.

Telephone expenses
Telephone calls directly related to the running of your investment property are tax deductible.

Travel undertaken to inspect the property or to collect the rent
Investment-related travel and car expenses include airfares, car hire, taxis and accommodation. These expenses are tax deductible if you incur these costs while collecting the rent, inspecting the property, or travelling for some other reason related to your investment property.

Water charges
Water rates are tax deductible if you, not your tenant, pay the water bill.
Whilst the above expenses are the most common deductibles on investment properties they may be other deductions that you are entitled to specifically relating to your investment property.