Tax deductions are sought after by property investors and even homeowners alike when the financial year ends. Who wouldn't want to have their money returned in one way or another after investing it for repairs, insurances, and other related expenses?
It's the same story every tax season – the big question is always "How do I pay my taxes while still keeping most of my hard-earned money to myself?"
The answer: tax deductions.
There are a lot of expenses investors need to shoulder to keep their properties in pristine condition, especially ones intended for rent. Keeping a property in pristine condition is a requirement for good business. After all, potential tenants do not want to live in a place with faulty utilities or pests eating up the posts.
Repairs are one thing, but regular maintenance is another. There is a constant outflow of cash out to keep the income stream in.
Under the Australian Taxation Office’s (ATO) guidelines, rental properties are subjected for tax deductions that can be claimed either for almost immediately or for a number of years (depending on the type of expenses).
Even residential homes with some part of the house used for business, such as for rent or used as an office, are also subjected to deductions.
What are deductibles for residential homes used partly or otherwise for profit?
A property that is solely residential (not a rental or investment property) only is not eligible for any tax deductions, but if you use some part of the house for income-producing work you could be in luck.
To be eligible for deductions, you must:
- Have a room exclusively for work purposes at home
- Work at your home (even without a specific place for it)
- Run your business from your home
The following are ones you can claim if you work from home but it is not your principal workplace:
|
Deductions you may be able to claim |
You do have a work area |
You don't have a work area |
|
Cost of using a room's utilities such as gas and electricity |
Yes |
Yes |
|
Work-related phone costs |
Yes |
Yes |
|
Decline in value (depreciation) of office plant and equipment such as desks, chairs and computers |
Yes |
Yes |
|
Decline in value (depreciation) of curtains, carpets and light fittings |
Yes |
No |
|
Occupancy expenses such as rent, mortgage interest, insurance and rates |
No |
No |
Table courtesy of The Australian Taxation Office
Homeowners running their business from their own abodes have the same deductions as those who have their own home office as illustrated in the table above. This can range from small business owners and operators; medical professionals with home clinics complete with equipment; craftsmen with workshop spaces; engineers and architects with their own drawing room boards, among many other professions.
The difference is that they can also avail deduction from occupancy expenses (such as rent, mortgage interest, and insurance) by getting the workroom’s floor area as a proportion of the entire house’s floor area.
What are deductibles for residential rental properties?
Rental properties generate income, which is why they are tax deductible.
Tax deductions are often categorized as those that can be claimed as soon as possible and those that are incurred over time. Yet, there are also expenses that cannot be reimbursed in any way.
Expenses that are considered to be capital or private costs in nature cannot be applied for a deduction – purchase cost, stamp duty, legal fees, inspection fees, sourcing fee, renovations and repairs made immediately after purchase, as well as any expenses made prior to the property's purchase.
Moreover, expenses made while the property is used for income generation are subject for deduction.
According to the ATO, they consider the following expenses incurred up for immediate deduction:
- Advertising costs for tenants
- Bank charges
- Body corporate fees and charges
- Cleaning costs
- Council rates
- Electricity and gas costs
- Gardening and lawn mowing costs
- In-house audio/video service charges
- Insurance (building, contents, public liability)
- Interest on loans
- Land tax
- Lease document expenses (preparation, registration, stamp duty)
- Legal expenses (excluding acquisition costs and borrowing costs)
- Mortgage discharge expenses
- Pest control costs
- Property agents fees and commissions
- Quantity surveyor’s fees
- Repairs and maintenance
- Secretarial and bookkeeping fees
- Security patrol fees
- Servicing costs
- Stationery and postage costs
- Telephone calls and rental costs
- Tax-related expenses
- Travel and car expenses
- Water charges
Repairs and maintenance, however, can be quite tricky. Anything that has been done to restore of a utility’s functionality is considered a repair – replacing a broken sink in the kitchen is deemed to be a simple repair.
On another note, replacing the kitchen layout is on a whole different level, as it is already a renovation to the place, thus placing the incurred expenses as a capital cost – a cost that is a part of the property and has a tendency to depreciate in time. To have an idea on how much these renovations would costs, try using our upfront and ongoing cost calculator.
Renovations and improvements fall under building costs which are usually deductible at 2.5% per annum for up to 40 years. A perfect example of a claim which can be deducted over a period of years as with borrowing expenses and expenses related to the decline in value of depreciating assets like carpets, air conditioning units, water systems, light fitting, security systems, etc.
Travel and car expenses can be claimed if and only if the money spent are primarily for visiting and inspecting your investment.
On the chance that you managed to squeeze in a bit of holiday, the deduction will be allocated to the expenses made for business such as plane tickets and accommodation, sans the leisurely stroll.
For those who were once using their property for commercial use then converted it back to a residential one, don’t fret – you can still file for tax deductions for money outlaid for the upkeep of the building apportioned over the time that it was still in business.
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